Over at BiggerPockets we came across the following discussion, Can you make deductible IRA contributions if you have solo 401k ?
P Joshi
· Santa Clara, California
This IRS page mentions that limits are subject to coverage under employer plan.
[url]http://www.irs.gov/Retirement-Plans/Are-You-Covered-by-an-Employer%27s-Retirement-Plan%3F[/url]
What if you are not covered by typical employer plan but if you have a self directed 401k / solo 401k (one member 401k plan for a self employed person)? Are you still prevented from IRA deduction similar to large employer 401k members?
Problem is that for new self-employment gig, schedule C income may be small and so retirement contributions to solo(k) (roughly max 25% of schedule C income) would be tiny. But, income from non-schedule C sources could be enough to make a deductible 5k contribution to IRA. But, if solo 401k is treated as W-2 employer plan, not much retirement contribution can be made either to IRA or solo(k).
Any clarification?
[url]http://www.irs.gov/Retirement-Plans/Are-You-Covered-by-an-Employer%27s-Retirement-Plan%3F[/url]
What if you are not covered by typical employer plan but if you have a self directed 401k / solo 401k (one member 401k plan for a self employed person)? Are you still prevented from IRA deduction similar to large employer 401k members?
Problem is that for new self-employment gig, schedule C income may be small and so retirement contributions to solo(k) (roughly max 25% of schedule C income) would be tiny. But, income from non-schedule C sources could be enough to make a deductible 5k contribution to IRA. But, if solo 401k is treated as W-2 employer plan, not much retirement contribution can be made either to IRA or solo(k).
Any clarification?
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This is a good question that I am interested to know the answer as well.
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You may have a 401K and an IRA, you can have multiple IRAs so long as
you follow the requirements for contributions, you could put all your
income in a tax qualified plans but with restrictions to 401Ks. You can
also have a self directed plan and you can mix plans, one could be a
regular IRA and you could have a Roth IRA. You can also make
contributions after the year end and apply them to last year's
deductions. You can open accounts after you are 59 1/2, the age at which
you may withdraw funds. At older ages you may also contribute more as
well.
This was the topic of our local financial TV show last Saturday, so I'm just passing along what they were saying! See your investment advisor for details. I got out of the financial planning side long ago, so I don't get into tax matters anymore or in giving financial advice. :)
This was the topic of our local financial TV show last Saturday, so I'm just passing along what they were saying! See your investment advisor for details. I got out of the financial planning side long ago, so I don't get into tax matters anymore or in giving financial advice. :)
Financexaminer@real estate investor dot com
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@P Joshi
you can make contributions to both, self-employed Solo 401k as well as IRA. The income source to calculate the contribution amount would be different for each of those retirement plans. In order to contribute to Solo 401k earned self-employment income must be used, depending on your business structure that could be income on schedule C or wages you pay to your self if you are incorporated. Please be sure to consult with knowledgeable CPA, if you need a referral, I would be glad to point you in the right direction.
you can make contributions to both, self-employed Solo 401k as well as IRA. The income source to calculate the contribution amount would be different for each of those retirement plans. In order to contribute to Solo 401k earned self-employment income must be used, depending on your business structure that could be income on schedule C or wages you pay to your self if you are incorporated. Please be sure to consult with knowledgeable CPA, if you need a referral, I would be glad to point you in the right direction.
Bill, thank you for your response. And yes, I agree with you that you can have a traditional IRA, as well as roth IRA in addition to your solo 401k. The only issue is that income limits to make tax-deductible contributions depend on whether you are covered by what IRS calls "employer plan". So, is a solo 401k based on someone's small self-employment income, covered under definition of "employer plan"?
Sorry, for wrong link format.
Check table 1.2 and 1.3 at this page:
http://www.irs.gov/publications/p590/ch01.html#en_US_2013_publink1000230467
So, if your solo 401k is same as "employer plan", for a single, you can make fully tax deductible IRA contribution only if your modified AGI is less than 59k. However, if you don't have 401k with W2 employer and your solo 401k is not counted as "employer plan" then, as per Table 1.3, you can make a tax deductible IRA contribution, regardless of how high your modified AGI is, if you are single / HoH (and income limit of 178k for married filing jointly)!
If solo(k) is counted as "employer plan" basically, your retirement contributions can only go to solo 401k and that is limited to probably approx 25% of your schedule C income only.
This IRS page tries to clarify employer plan but it is not clear to me if solo 401k fits the bill.
http://www.irs.gov/Retirement-Plans/Are-You-Covered-by-an-Employer%27s-Retirement-Plan%3F
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