100% Income in Solo 401k + Backdoor Roth

[spiritrider]

It really comes down to the definition of compensation and what decreases that compensation. Pre-tax deferrals reduce compensation, post tax do not

Think of it in the case of a W-2 employee with $18K in wages making a 100% 401k $18K deferral (leaving out the required FICA deductions for sake of argument)

First, assume that all of that deferral is traditional (pre-tax). Their W-2 Box 1 will be $0, meaning there is nothing left to make a IRA contribution.

Next assume that $12,500 of that deferral is traditional (pre-tax) and $5,500 of that deferral is Roth (post-tax). Their W-2 Box 1 will be $5,500, leaving $5,500 in compensation to make an IRA contribution.

With a sole proprietor it is similar, but both pre-tax deferrals and pre-tax employer contributions are combined on Form 1040 line 28 and reduce compensation. Roth deferrals are not reported anywhere and do not reduce compensation.

[jfoxcpacfp]

According to you, a taxpayer with a W2 for $5,500 with a non-working spouse would be allowed to make a $5,500 Roth contribution for both herself and her spouse.

I'm still going to search for that reference, which may not matter at this point.

[spiritrider]

jfoxcpacfp wrote:

According to you, a taxpayer with a W2 for $5,500 with a non-working spouse would be allowed to make a $5,500 Roth contribution for both herself and her spouse.

I’m still going to search for that reference, which may not matter at this point.

Click to expand...

No, IRA contributions are not treated the same. Therefore, you still need $11,000 in compensation to make two IRA contributions in your scenario regardless whether they are Roth or not.

See Publication 590-A Contributions to Individual Retirement Arrangements (IRAs), page 9, Kay Bailey Hutchison Spousal IRA Limit

For 2016, if you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following two amounts:

• 1. $5,500 ($6,500 if you are age 50 or older), or


• 2. The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts.


• a. Your spouse's IRA contribution for the year to a traditional IRA.


• b. Any contributions for the year to a Roth IRA on behalf of your spouse.

This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $11,000 ($12,000 if only one of you is age 50 or older or $13,000 if both of you are age 50 or older).

 

The adjustments in compensation depend on pre-tax deductions or not. So while pre-tax deferrals or cafeteria plan deductions reduce compensation, Roth deferrals do not.

See Publication 590-A Contributions to Individual Retirement Arrangements (IRAs), page 6, What is Compensation.

Wages, salaries, etc. Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.

So anything that reduces W-2 Box 1 (pre-tax deferrals and Section 125 Cafeteria Plan deductions including HSA contributions by payroll deduction) reduces W-2 compensation available for IRA contributions. Roth deferrals do not reduce W-2 Box 1 amounts.

Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:

• The deduction for contributions made on your behalf to retirement plans, and


• The deduction allowed for the deductible part of your self-employment taxes.

So any self-employment pre-tax contributions that are deducted on line 28 (pre-tax employee deferrals and employer contributions) reduces self-employment compensation available for IRA contributions. Roth deferrals are not deductible and therefore do not reduce self-employment compensation.