Solo Roth 401k contribution limit in practice
As a self-employed person, if I earned exactly $19,500 net on my Schedule C for 2020, is there any reason I can’t contribute the entire $19,500 into my solo Roth 401k for 2020 if I made no other solo 401k/SEP, etc. contributions? Does some downward adjustment occur on the tax return (self-employment deduction, 199A, etc?) to reduce the $19,500 contribution limit in practice?
Permalink Submitted by Alan - IRA critic on Mon, 2021-10-11 16:27
You must deduct 1/2 of your SE tax, which would be 2,755/2 or 1,378. Max contribution is 18,122.
Permalink Submitted by Dan Simonds on Mon, 2021-10-11 17:00
Thank you! Now it makes sense. For the maximum $19,500 it’s necessary to earn a bit more.
Permalink Submitted by William Tuttle on Mon, 2021-10-11 20:51
Since the Roth 401k contribution does not reduce your net earnings from self-employment (earned income) = business profit – 1/2 SE tax. You can use the same self-employed earned income to:
Make a traditional and/or Roth IRA contributions up to the combined IRA contribution limit. This is subject to the traditional IRA deduction income limit or the Roth IRA contribution income limit.
Take the self-employed health insurance deduction if you or a spouse are not eligible to be covered under an employer group health insurance plan. Only 401k pre-tax traditional employee deferrals and employer contributions directly reduce earned income available for the SEHI deduction.
With QBI reduced by the SEHI deduction above, take the QBI deduction. Only 401k pre-tax traditional employee deferrals and employer contributions directly reduce QBI for the QBI deduction.
Note: Alan’s SE tax example amount above assumes that any total W-2 Box 3 Social Security (SS) wages + (0.9235 * business profit) does not exceed the SS maximum taxable earnings (2021= $142,800). If it does, Schedule SE will show what the actual SE tax and 1/2 SE tax will be.