Solo 401(k) and Severance Payments

Submitted by Francis Giordano on Wed, 2021-01-20 19:56

Was let go by firm in April 2020. For 2020: Gross wages $45k. 401(k) contributions approx. $8k. HSA contributions approx. $3k. Was locked out of any further contributions to either once I was terminated. Currently over 55.
Rolled over HSA into a new HSA and opened a solo 401(k) in Dec. 2020 in anticipation of self-employment income. Only received severance ($50k) and Unemployment ($20K) for the remainder of 2020. Can any of that income be used as a source for Solo 401(k) or HSA contributions for 2020?



Submitted by Alan - IRA critic on Wed, 2021-01-20 20:47

You don’t need earned income for HSA contributions, but your contribution limit is pro rated by the number of months you had HDHP coverage on the first of the month, unless you have the coverage on 12/1. For the solo K you must have net income from self employment, and neither your severance or UC qualify. You do have plenty of income to qualify for an IRA contribution, but not enough info here to know whether your MAGI is too high for deductible TIRA contributions or Roth contributions. 

Submitted by Francis Giordano on Wed, 2021-01-20 21:11

Thanks.  I thought HSA was ok, just checking since I was posting anyway. Total 2020 income was listed above ~$115k, married filing jointly. I thought If I already contributed $8k to my 401(k) then a deductible IRA was not allowed. I do contribute to non-deductible IRA annually, then convert to Roth.

Submitted by Alan - IRA critic on Wed, 2021-01-20 21:25

If MFJ, you would be in the MAGI phaseout range for an IRA deduction in 2020, but may drop below that in 2021 without the income or severance.  But you qualify for a direct Roth contribution in 2020, so no need to do the back door Roth unless it is already done. 

Submitted by Francis Giordano on Wed, 2021-01-20 21:32

Thanks!

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