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Solo401K contribution from side income

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  • Solo401K contribution from side income

    I am limited in the amount I can contribute to my regular 401K from my main gig due to the non-discriminatory testing for our 401K plan. Instead of maxing out at $19,500, I can only contribute about $13000 from my main job. My 2 questions are as follows. (1) Can I contribute the remaining $6,500 from my side income to the employee contribution to a solo401K (of course, with the idea to contribute another 20% as an "employer contribution")? (2) Is there an income requirement in order for me to contribute the $6,500? Thanks in advance.

  • #2
    1. Yes, but keep in mind that at lower income levels, your employer contributions could be limited to (self-employed earned income - employee deferrals) / 2.
    2. The (employee + employer) annual addition limit is the lessor of the statutory limit (2021 = $58K) and 100% of your compensation. You would need a minimum of $6,500 in business profit - SE tax to make a $6,500 employee deferral. More to make employer contributions subject to 1.

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    • #3
      This is great info. I didn't realize that SE tax is utilized to make the calculation. Thanks! In regards to the annual limit of $58K for 2021, I am under the impression that each "side gig" allows for additional "employer contributions" to the 401K. So for example, if a professional had a main job and had 2 side income sources, then he/she would be able to make "employer contributions" to the 2 additional solo401K's that would surpass a total of $58K for the year. Am I correct on this? In theory, there could be many multiple side gigs resulting in many multiple 401K's if my assumption is correct.

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      • #4
        Originally posted by PulmDoc777 View Post
        This is great info. I didn't realize that SE tax is utilized to make the calculation. Thanks! In regards to the annual limit of $58K for 2021, I am under the impression that each "side gig" allows for additional "employer contributions" to the 401K. So for example, if a professional had a main job and had 2 side income sources, then he/she would be able to make "employer contributions" to the 2 additional solo401K's that would surpass a total of $58K for the year. Am I correct on this? In theory, there could be many multiple side gigs resulting in many multiple 401K's if my assumption is correct.
        This is not correct. All 1099 income generated by you is aggregated for purposes of calculating the $58k limit. Multiple 401k profit-sharing contributions must come from unrelated employers. You are related to yourself (obviously😎) for purposes of this limitation. It gets more complex if you run into the affiliated/controlled group regulations, but no need to get into that here.
        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          I see. So if the main income source is W2 income (with profit sharing resulting in a total contribution of $58K) and there is some additional 1099 side income...would those be considered "unrelated" enough to go beyond the 58K limit? In other words, would W2 income and 1099 income be considered "unrelated employers?"

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          • #6
            There is a separate 415c annual addition limit for each unrelated employer.

            If you have no ownership interest in your W-2 employer and you are not a 403b participant, you are not considered related to that employer.

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            • #7
              Thanks for the insight

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