ForumsSolo 401k ContributionsMaximum 401K contributions for W2 income for C corp

Forums Solo 401k Solo 401k Contributions Maximum 401K contributions for W2 income for C corp

  • Maximum 401K contributions for W2 income for C corp

    11 Replies
  • Top SubjectSolo 401k Contributions,Solo 401k
    Top ForumsSolo 401k Contributions, Solo 401k

    Thuy-Tien L.
    Top SubjectSolo 401k Contributions,Solo 401k

    April 1, 2022 at 12:36 pm

    I have reviewed the posts related to this question but didn’t find the needed answers yet so here is my question:

    If I have W2 income of, eg $25,000.00, from my own C corp & I, as the employee, contributed the max $20,500.00 (single) to my solo401K, what is the maximum amount that my C corp can match & how much can I put in for my after-tax bucket?

    If I put in the maximum allowed for the employer, it would be 25% of my W2 income, which would be 0.25*25,000 = $6250.00. This then makes the total contribution to my solo 401K to be (A) $26,750.00 (ROTH $20,500.00 & Pre-tax employer $6250.00), more than my W2 income. Is this permissible or am I only allowed to put in $4500.00 for employer matching for total to be (B) $25,000.00 (ROTH $20,500.00 + pre-tax employer matching $4500.00).

    For either options A or B above, what would then be my maximum allowable to contribute to my after tax 401K bucket?

    Thank you.

    Thuy-Tien L.
  • George Blower

    Top SubjectSolo 401k,Solo 401k Contributions
    Top ForumsSolo 401k, Solo 401k Contributions

    George Blower

    George Blower

    Top SubjectSolo 401k,Solo 401k Contributions

    April 3, 2022 at 11:21 pm

    @Tien

    Top SubjectSolo 401k Contributions,Solo 401k

    Thank you for posting your questions!

    1) This confirms that one can’t make Solo 401k contributions (whether employee, employer or voluntary after-tax) in excess of your self-employment compensation.

    2) As such and in the scenario that described below, one can only make additional contributions equal to $4,500.

    3) If such amount is contributed as an employer contribution, no additional contributions may be made including voluntary after-tax contributions.

  • Top SubjectSolo 401k Contributions,Solo 401k
    Top ForumsSolo 401k Contributions, Solo 401k

    Thuy-Tien L.
    Top SubjectSolo 401k Contributions,Solo 401k

    May 18, 2022 at 12:01 pm

    I was reading some other posts in this forum, regarding ROTH IRA contributions after maximizing solo401K contributions, & now am confused.

    For 2021 contributions, using the example below for W2 income earned via a C corp, how much (maximum) can I contribute to a ROTH IRA (for <50 yo) if I contributed as follows to my solo401K?

    Salary: $51,000.00

    Employee contribution to solo401K: $19,500.00

    Employer contribution to solo401K: $12,750.00

    Employee After tax contribution to solo401K: $17,000.00

    Thank you.

    Thuy-Tien L.
    • George Blower

      Top SubjectSolo 401k,Solo 401k Contributions
      Top ForumsSolo 401k, Solo 401k Contributions

      George Blower

      George Blower

      Top SubjectSolo 401k,Solo 401k Contributions

      May 18, 2022 at 8:01 pm

      1. Assuming that one does not make contributions to another retirement plan sponsored by an unrelated employer (e.g. “day job” 401(k)) and moreover that the Solo 401(k) was established on or before December 31, 2021, one may make the following contributions:

      • Employee contributions to the Solo 401(k): 100% of the self-employment compensation not to exceed $19,500 (or $26,000 if 50 or older) for 2021;
      • Employer contributions to the Solo 401K: 25% of the self-employment compensation (provided that total contributions made to the Solo 401k do not exceed the overall limit (e.g. $58,000 for 2021));
      • The voluntary after-tax contribution limit is equal to 100% of your self-employment compensation not to exceed the overall limit (i.e. $58,000 for 2021) reduced by any employee or employer contributions made to the Solo 401(k).

      2. As such and with respect to the example posed below, one may make voluntary after-tax contributions equal to $18,750 (i.e. $51,000 LESS $19,500 of employee contributions LESS $12,750 of employer contributions).


      3. While the fact that one makes solo 401(k) contributions will not reduce the ability of such person to make a Roth IRA contribution, one must still make the Roth IRA contribution subject to the contribution limits and rules (e.g. one must have separate income (not necessarily self-employment income) to justify the Roth IRA contribution and one’s income must not be higher than the AGI limit that applies to Roth IRA contributions).

  • Top SubjectSolo 401k Contributions,Solo 401k
    Top ForumsSolo 401k Contributions, Solo 401k

    Thuy-Tien L.
    Top SubjectSolo 401k Contributions,Solo 401k

    May 18, 2022 at 8:21 pm

    Sorry, George, it’s still not clear for me on the ROTH IRA contribution. I understand the solo401K contribution limits but the ROTH IRA is not clear to me.

    Using the example numbers I gave in my previous post, considering that my W2 salary for my C corp is $51,000.00, can I put in another $6000.00 into my ROTH IRA if I had already put in $19,500 for my employee ROTH solo401K, $12,750 as an employer contribution (25% of $51K), & $17,000 as an after tax? [yes, I know I can put in $18,750 for my after tax employee contribution but I didn’t.] Therefore, the max I contributed to my solo401K was $49,250.00.

    Thus, am I only allowed to contribute another $1750 into my ROTH IRA to equal everything out to $51K or am I allowed to contribute another $6K into my ROTH IRA regardless of my income as long as it hasn’t exceeded the salary limit of $129K for single tax filing, $204K married filing jointly?

    Or are you saying that I can’t use my W2 salary from my C corp as income to qualify for a ROTH IRA contribution & that I need a separate income source to qualify?

    Thank you.

    Thuy-Tien L.
    • George Blower

      Top SubjectSolo 401k,Solo 401k Contributions
      Top ForumsSolo 401k, Solo 401k Contributions

      George Blower

      George Blower

      Top SubjectSolo 401k,Solo 401k Contributions

      May 19, 2022 at 2:05 am

      One needs income to justify a Roth IRA contribution.

      Such income may be self employment income (but doesn’t have to be) provided that one may not use the same self employment income to justify a solo 401k contribution and a Roth IRA contribution.

      Therefore, if one has no other income other than self employment income (which self employment income was not used to justify a solo 401k contribution) then one may only make a Roth IRA contribution equal to the lesser of such income or the Roth IRA contribution limit (ie $1750 in the hypothetical presented).

  • Top SubjectSolo 401k Contributions,Solo 401k
    Top ForumsSolo 401k Contributions, Solo 401k

    Thuy-Tien L.
    Top SubjectSolo 401k Contributions,Solo 401k

    May 30, 2022 at 4:34 pm

    George,

    Happy Memorial Day.

    I have reviewed your answer multiple times. From your answer, I understood it to be: if I want to maximize the contributions to a solo401K ($58,000 in 2021) & also contribute another $6000 to a ROTH IRA in 2021, I would have to have at least $64,000 in earned income. Is this correct?

    If that is the case, then I’m confused with a question asked by another forum member & answered by Mark Nolan in March 2022. The question was asked differently. See below. :

    “QUESTION 1:
    I am a sole proprietor, have a solo 401k and report $20,000 of line 31 net self-employment income.

    For 2022, if I contributes $6,000 to my Roth IRA, can I still contribute $18,587.05 to my Roth designated solo 401k account for 2022 based on $20,000 of line 31 schedule C income or do I have to first reduce the $18,587.05 by the $6,000 Roth IRA contribution?

    ANSWER:
    You are able to make an elective deferral Roth solo 401o contribution of $18,587.05 for 2022 based on $20,000 of line 31 Schedule C self-employment income. Any Roth IRA contribution you can make based on your filing status and modified gross income up to the $6,000 limit for 2022 would not reduce your adjusted gross income since Roth IRA contributions are not deductible.

    QUESTION 2:
    How about vice versa, if I maximize my Roth designated solo 401k contribution with $20,000 of line 31 income, will I not be able to make any Roth IRA contributions?

    ANSWER:
    Roth solo 401k designate contributions do not reduce your modified adjusted gross income. The amount of any Roth IRA contributions you can make depend on your filing status and modified adjusted gross income. As you can see by the following language an chart found in IRS Pub 590, neither Roth solo 401k contributions nor voluntary after-tax solo 401k contributions reduce your MAGI.”

    From the first question/answer, it appears that Mark is saying that this person can contribute $24,587.05 ($18,587.05 to the ROTH solo401K & $6000 to the ROTH IRA) despite having only $20,000 in earned income.

    I’m so confused. Really trying to understand so I know how to fix my ROTH IRA contribution that I did in 2021, if needed.

    Thank you,

    Tien

    Thuy-Tien L.
    • George Blower

      Top SubjectSolo 401k,Solo 401k Contributions
      Top ForumsSolo 401k, Solo 401k Contributions

      George Blower

      George Blower

      Top SubjectSolo 401k,Solo 401k Contributions

      June 1, 2022 at 2:46 am

      Thank you for your follow up post.

      This goes back to the point in my last post in this thread: contributions to a solo 401k are based on earned self-employment income whereas contributions to a Roth IRA are based on income generally (whether from self-employment income or other types of income).

      Please review the following from my last post in this thread:

      Such income may be self employment income (but doesn’t have to be) provided that one may not use the same self employment income to justify a solo 401k contribution and a Roth IRA contribution.
      Therefore, if one has no other income other than self employment income (which self employment income was not used to justify a solo 401k contribution) then one may only make a Roth IRA contribution equal to the lesser of such income or the Roth IRA contribution limit (ie $1750 in the hypothetical presented).


  • Top SubjectSolo 401k Contributions,Solo 401k
    Top ForumsSolo 401k Contributions, Solo 401k

    Thuy-Tien L.
    Top SubjectSolo 401k Contributions,Solo 401k

    June 1, 2022 at 10:55 am

    George,

    Thanks again for your reply. Just by reading your post alone, I understand that there has to be sufficient income to qualify for the 401K contribution AND the ROTH IRA. However, from reading Mark Nolan’s replies to other members here in the community, I am giving the impression that one can contribute to a ROTH IRA even if one has already maxed out on the solo401K contribution (eg $58K contribution at $58K self-employment income) which would make total contribution between the ROTH IRA & solo401K at $64,000 based on $58K alone.

    Since I do have to get to the bottom of this to determine if I need to request return of any excess ROTH IRA contribution (based on your answer) for 2021, would you be able to provide me a reference? I want to make sure I’m doing this correctly.

    Thank you,

    Tien

    Thuy-Tien L.
    • George Blower

      Top SubjectSolo 401k,Solo 401k Contributions
      Top ForumsSolo 401k, Solo 401k Contributions

      George Blower

      George Blower

      Top SubjectSolo 401k,Solo 401k Contributions

      June 2, 2022 at 3:23 am

      1) First, I agree that it is possible to make a Solo 401k contribution up to the overall limit as well make a Roth IRA contribution up to $6,000. For example, consider the following scenarios:

      Scenario 1:

      • Self-employed person with a Solo 401k who has self-employment compensation equal to $192,500 plus other additional non-self-employment income of $20,000.
      • This person could make Solo 401k contributions up to $58,000 for 2021 (i.e. $19,500 employee contribution and $38,500 employer contribution) based on the self-employment compensation (assuming that no contribution is made to another employer plan such as a “day job” 401k).
      • This person could make a $6,000 Roth IRA contribution based on their non-self-employment income (assuming that their income is not above the threshold above which one is not eligible to make Roth IRA contributions).

      Scenario 2:

      • Self-employed person with a Solo 401k who has self-employment compensation equal to $192,500 with no other sources of income.
      • This person could make Solo 401k contributions up to $58,000 for 2021 (i.e. $19,500 employee contribution and $38,500 employer contribution) based on the self-employment compensation (assuming that no contribution is made to another employer plan such as a “day job” 401k).
      • If this person elects to make a $58,000 Solo 401k contribution for 2021, this person is not eligible to make a $6,000 Roth IRA contribution because all of their self-employment income is being used to justify their Solo 401k contribution and they have no other income to justify the Roth IRA contribution.

      2) The notion that one must have income to justify an IRA contribution is clear based on the main IRS page discussing the IRA contribution limits. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

  • Top SubjectSolo 401k Contributions,Solo 401k
    Top ForumsSolo 401k Contributions, Solo 401k

    Thuy-Tien L.
    Top SubjectSolo 401k Contributions,Solo 401k

    June 4, 2022 at 9:55 am

    I apologize,

    @george

    George Blower

    Top SubjectSolo 401k,Solo 401k Contributions

    , but I’m not able to find information from the reference that you provided that says ROTH IRA has to be based on income that’s separate from self-employment income that we used for our solo401K contributions. All it says is that we need some kind of income to allow us to contribute to the ROTH IRA.

    If you’re saying that I already used up my net self employment income when I contributed to my solo401K, I think that would only be true if I contributed to my pre-tax solo401K. Whatever’s left of the MAGI would then go to determining my ROTH IRA contribution. However, since I contributed to my ROTH solo401K, I technically have not reduced any of my MAGI.

    Furthermore, the IRS said that people can still contribute to their ROTH IRA (or even traditional IRA) even if they’re covered by a retirement plan at work. They didn’t say that the employees/individuals should have another source of income aside from their regular W2 just so they can contribute to their individual IRA.

    “Can I contribute to a traditional or Roth IRA if I’m covered by a retirement plan at work?
    Yes, you can contribute to a traditional and/or Roth IRA even if you participate in an employer-sponsored retirement plan (including a SEP or SIMPLE IRA plan). See the discussion of IRA Contribution Limits. If you or your spouse is covered by an employer-sponsored retirement plan and your income exceeds certain levels, you may not be able to deduct your entire contribution. See the discussion of IRA deduction limits.”

    https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras

    If you think I’m not interpreting something correctly, please let me know so I can have a better understanding of this concept.

    Thank you,

    Tien

    Thuy-Tien L.
    • George Blower

      Top SubjectSolo 401k,Solo 401k Contributions
      Top ForumsSolo 401k, Solo 401k Contributions

      George Blower

      George Blower

      Top SubjectSolo 401k,Solo 401k Contributions

      June 7, 2022 at 3:36 am

      Question:

      I’m not able to find information from the reference that you provided that says ROTH IRA has to be based on income that’s separate from self-employment income that we used for our solo401K contributions. All it says is that we need some kind of income to allow us to contribute to the ROTH IRA.

      Response:

      One must have taxable compensation to justify a Roth IRA (as well as not have income above the limit at which one is not eligible to make Roth IRA contributions). Taxable compensation may include earned self-employment income (provided that such income is not being used to justify a Solo 401k contribution) as well other types of earned income (such as wages from a day job). See more IRS Publication 590

      Question:

      If you’re saying that I already used up my net self-employment income when I contributed to my solo401K, I think that would only be true if I contributed to my pre-tax solo401K. Whatever’s left of the MAGI would then go to determining my ROTH IRA contribution. However, since I contributed to my ROTH solo401K, I technically have not reduced any of my MAGI.

      Response:

      It is well understood that retirement contributions count towards the contribution limits regardless of whether such contributions are made on a pre-tax or Roth basis such that one may not use the same self-employment compensation to justify both a Solo 401k contribution as well a Roth IRA contribution.

      Question:

      Furthermore, the IRS said that people can still contribute to their ROTH IRA (or even traditional IRA) even if they’re covered by a retirement plan at work. They didn’t say that the employees/individuals should have another source of income aside from their regular W2 just so they can contribute to their individual IRA.

      Response:

      I agree that one may contribute to both a Solo 401k and Roth IRA subject to the caveats stated previously: (i) one must have taxable compensation to justify such Roth IRA contribution; and (ii) taxable compensation may include earned self-employment income provided that such self-employment income is not separately used to justify a Solo 401k contribution.

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