100% Income in Solo 401k + Backdoor Roth

[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.

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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.

[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]

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]

spiritrider wrote:

If you are talking about an individual not making a spousal IRA contribution, they can only make retirement plan contributions up to their available compensation. For example, a single individual with $18,000 in net self-employment income (net business profit – 1/2 SE tax) who made a Solo 401k pre-tax deferral of $18,000.  They could not make an IRA contribution, because that deferral reduced their available compensation to $0.

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This sounds obvious to me, but when I tried to find IRS guidance, I found the opposite - after about 20 minutes of googling! Needless to say, I cannot find the cite now, which I should have saved. Maybe I misinterprerted, and I'll have to try again later when tax reviews are caught up. Can you give me a reference? It was difficult to find a search string to research as most material points toward maximum, not minimum, income limits.

[spiritrider]

jfoxcpacfp wrote:

However, I was interested in whether you could contribute $18k to your SOLO-k and then contribute $5,500 to an IRA on your own behalf, which was your original question. I had never had that question before and was pretty sure you couldn’t. Upon research, however, it appears that I was wrong and that you can, indeed, contribute a total of $23,500 to retirement accounts on only $18k of earned income. Interesting.

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If you are talking about an individual not making a spousal IRA contribution, they can only make retirement plan contributions up to their available compensation.

For example, a single individual with $18,000 in net self-employment income (net business profit - 1/2 SE tax) who made a Solo 401k pre-tax deferral of $18,000.  They could not make an IRA contribution, because that deferral reduced their available compensation to $0.

However, if in the example above, the individual made a Solo 401k pre-tax deferral of $12,500 and a Solo 401k Roth deferral of $5,500. They could make a $5,500 IRA contribution, because there was $5,500 of compensation available.

Of course the OP with the available compensation of their spouse, can make a spousal IRA contribution, regardless.

[Dr. Mom]

Be careful with the idea of putting 100% of income into the Solo 401k.  You need to take Self-Employment Tax into account.  So in fact you can put 92.35% into the 401k.  So if you have $18,000 of income, you can put 18,000*0.9235=$16,623 into the 401k.  To max the $18,000 you need to earn $18,000/0.9235=$19,491.

[ENT Doc]

jfoxcpacfp wrote:

ENT Doc wrote:

Yeah, Pub ?590? deals with this.  Your ability to contribute to a Traditional is also dependent on the spouse’s earned income.  This is the spousal IRA concept.  The spouse’s EI allows you to put excess money away even though you didn’t earn it.  I believe you must filed married filing jointly (not sure why you wouldn’t but just to throw that out there).  My wife and I are in a similar situation.

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Actually, anybody with enough earned income can contribute to a TIRA. The ability to deduct the contribution is predicated on the family’s earned income and the ability to participate in employer retirement plans.

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Yes!  Sorry I misspoke.  I don't know why but my mind was going to the stay at home mom/dad situation, kind of like the last poster.

[brownie73]

I know that you can contribute to Roth IRA for a spouse who doesn't work. My husband is a SAHD and we do Backdoor Roth IRA for each of us even if he doesn't have any income (he did make a little on a side gig but less than $5,500).

[AR]

Yeah, this seems pretty standard.  My wife has not earned any income in years, and we're doing back door Roths for her every year.   So if her income is $0 and I can do it, it seems you should be able to do it to.   I did run this by an accountant a long time ago, but now I guess I'll go double-check.

[jfoxcpacfp]

ENT Doc wrote:

Yeah, Pub ?590? deals with this.  Your ability to contribute to a Traditional is also dependent on the spouse’s earned income.  This is the spousal IRA concept.  The spouse’s EI allows you to put excess money away even though you didn’t earn it.  I believe you must filed married filing jointly (not sure why you wouldn’t but just to throw that out there).  My wife and I are in a similar situation.

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Actually, anybody with enough earned income can contribute to a TIRA. The ability to deduct the contribution is predicated on the family's earned income and the ability to participate in employer retirement plans.

[ENT Doc]

Yeah, Pub ?590? deals with this.  Your ability to contribute to a Traditional is also dependent on the spouse's earned income.  This is the spousal IRA concept.  The spouse's EI allows you to put excess money away even though you didn't earn it.  I believe you must filed married filing jointly (not sure why you wouldn't but just to throw that out there).  My wife and I are in a similar situation.

[STM]

jfoxcpacfp wrote:

However, I was interested in whether you could contribute $18k to your SOLO-k and then contribute $5,500 to an IRA on your own behalf, which was your original question. I had never had that question before and was pretty sure you couldn’t. Upon research, however, it appears that I was wrong and that you can, indeed, contribute a total of $23,500 to retirement accounts on only $18k of earned income. Interesting.

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That's great. Thank you!!

[jfoxcpacfp]

STM wrote:

If I setup a Solo 401k and contribute 100% of my income (all IC) in 2017, can I ALSO contribute to a traditional IRA in the same year? I figure I’m probably capped at 100% of income, but I wasn’t sure because of the various spousal IRA options. (My husband is a W2 physician, I’m a freelancer.)

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Of course, you can contribute 100% of your compensation ($18k) to a SOLO-k and then your DH can contributr to a spousal back-door IRA on your behalf.

However, I was interested in whether you could contribute $18k to your SOLO-k and then contribute $5,500 to an IRA on your own behalf, which was your original question. I had never had that question before and was pretty sure you couldn't. Upon research, however, it appears that I was wrong and that you can, indeed, contribute a total of $23,500 to retirement accounts on only $18k of earned income. Interesting.

[STM]

So just as an example, if I earn $18,000 in IC income (freelance writer) and my husband earns $400,000 in W-2 income (physician), I can personally contribute $18,000 to my Solo 401k + $5,500 to my traditional IRA in the same year? I thought you couldn't contribute more then you earned as an individual.

[ENT Doc]

You should be able to do a traditional IRA contribution for both you and your wife.  The spousal IRA is based on earned income.  I'd just double check what that is, but I'm pretty sure you'd qualify.