Author Topic: IRA & Solo 401k Combo: How does this work?  (Read 2354 times)

whiskeyjack

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IRA & Solo 401k Combo: How does this work?
« on: January 30, 2015, 07:41:20 PM »
I've been contributing to a Roth IRA for many years, starting back when I was earning no income but my spouse was.   I've since got a side hustle going where I bring in about $13,000 per year and have just continued to contribute the max into the IRA the whole time.

I recently learned that I could open a solo 401k for myself as well.    But.. if I contribute the max to my 401k (which would be slightly less than my $13,000 income) can I still make contributions to the Roth?   Reading the language again it says my max contribution is $5500 or my earned income.  If I'm already shifting my income into a 401k, does that make it effectively $0 earned income leftover for the IRA?

hodedofome

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Re: IRA & Solo 401k Combo: How does this work?
« Reply #1 on: January 30, 2015, 07:52:25 PM »
I believe you are correct. But I also don't think you can contribute 100% of your business income to the solo 401k either. I could be wrong about that, I'm no expert.

whiskeyjack

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Re: IRA & Solo 401k Combo: How does this work?
« Reply #2 on: January 30, 2015, 08:16:29 PM »
The amount I can contribute to the solo 401k is my total income less 1/2 of the self employment tax (I believe.)  It's pretty close to the whole amount.   

If both of those have to be based off of my income, drawing from the same pool of funds,  then either I could put it all into the 401k or put $5500 into the Roth and then the remainder (another $6500-ish) into the 401k.   I never thought of it before because I always considered the Roth contribution as a freebie, based off of spouse's income.   I don't want to cause trouble by putting in too much, but I don't want to leave money out of a tax sheltered account if I don't have to.

terran

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Re: IRA & Solo 401k Combo: How does this work?
« Reply #3 on: January 31, 2015, 07:24:06 AM »
I believe you can contribute to an IRA based on your spouse's earnings in addition to your own. The solo 401k has to be from your own earnings. You should verify that, but I think that's how it works.

Also, for the solo 401k, it's something like 20% of your income as the employer contribution, then everything up to the $18k max of your own income after expenses (including both sides of the self employment taxes. Here's a calculator you can play with: http://www.bankrate.com/calculators/retirement/self-employed-401-k-calculator.aspx
« Last Edit: January 31, 2015, 07:26:49 AM by terran »

seattlecyclone

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Re: IRA & Solo 401k Combo: How does this work?
« Reply #4 on: January 31, 2015, 11:10:19 AM »
In a solo 401(k) you can make contributions as both the employer and the employee -- this lets you go higher than the standard $18k 401(k) limit if your self-employment income is higher (which it isn't in this case).

The IRA limits are completely separate from this. I think it's true that if you put your whole self-employment income into the traditional 401(k) then you have no earned income of your own to count for IRA eligibility. However terran is correct that you can make IRA contributions based on your spouse's income as well -- so if they have at least $11k of taxable income you can both make full IRA contributions.

whiskeyjack

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Re: IRA & Solo 401k Combo: How does this work?
« Reply #5 on: February 01, 2015, 10:20:35 AM »
Thanks to both of you.  After digging deeper I found language on the IRS site to support basing my IRA contribution off of spouse's income if my income was either $0 or just very low.

Extra $6k into tax advantaged accounts!