How much W2 income is needed to fully fund Solo (k + back door Roth IRA
I was curious to get an opinion on the minimum amount someone needs to W2 themselves as an S-Corp to max out their tax advantaged retirement accounts. Would you please take a look at the below scenarios and give an opinion on which would be allowed and which would not be allowed?
Scenario 1- $61,000 of W2 Income-Max Solo K 61,000
Contributions- $20,500 Pretax employee + $15,250 Profit sharing + $25,250 Voluntary After Tax
Would this mix of Contributions be allowed?
Scenario 2- $48,800 of W2 Income-Max Solo K 61,000
Contributions- $20,500 Pretax employee + $12,200 profit sharing + $28,300 of Voluntary After Tax
Would this mix of contributions be allowed?
Scenario 3- $48,800 of W2 Income-Max Solo K 61,000 + Adding in a Roth IRA $6000 Contribution
Contributions- $20,500 Pretax employee + $12,200 profit sharing + $28,300 of Voluntary After Tax + $6,000 Roth IRA Contribution. Would this mix of contributions be allowed, or would I need to increase my W2 wage to $54,800 to allow for the additional $6,000 Roth IRA Contribution?
Permalink Submitted by William Tuttle on Wed, 2021-12-29 12:53
First of all, your facts and circumstance mandates a minimum Reasonable Compensation.
You are not arbitrarily allowed to set your W-2 wages to meet one-participant 401k contribution limits if they are not minimum reasonable compensation.
If you fail to pay yourself minimum reasonable compensation, you are subject to being ordered by the IRS to pay yourself reasonable compensation, pay the deficient FICA taxes and be assessed a 100% penalty on that amount.
With that said, the (employee + employer) contribution annual addition limit is the lessor of your compensation and the statutory limit (2022 = $61,000). If you pay youself less compensation than the latter, that is your annual addition limit.
The IRA contribution limit is separate and distinct than the annual addition limit. All that is required is that you have sufficient IRA Compensation. See IRS Publication 590-A What is Compensation.
For most people who are not self-employed this will be your W-2 Box 1.