Not Enough Total Earned Income to Contribute to Both a Roth IRA and a Self-Directed Solo 401k

However, Roth IRA contributions do count towards your total IRA contribution limit. So, if you contribute to both a Roth and traditional IRA, the combined amount can’t exceed the annual contribution limit, which for 2022 is $6,000 ($7,000 if you’re 50 or older).

Same for spousal Roth IRA contribution, those contributions don’t count toward your solo 401k annual contribution limit. The total of your combined contributions in a spousal IRA can’t exceed the taxable compensation reported on a joint tax return.

Yearly annual contributions to a self-directed solo 401k are not impacted by your Roth IRA contributions.

Put differently, Roth IRA contributions won’t reduce the total solo 401k contribution provided enough net self-employment income was generated to make the the applicable solo 401k contribution.

The net self-employment income for solo 401k contribution purposes is not impacted by Roth IRA contributions.

To determine how much can be contributed to the solo 401k, you first have to determine the business owner’s earned income or net earnings from self-employment income.

If the self-employed business is a sole proprietorship, the net self-employment figure is found on line 31 of Schedule C. Subsequently, 1/2 of self-employment income tax is subtracted from the line 31 figure. The resulting amount is referred to as the business’s owner’s adjusted net business income.

While both designated Roth solo 401k and Roth IRA contributions cannot be claimed as deductions on your tax return, pretax solo 41k contributions do reduce your taxable income. For example, pretax contributions for a sole proprietorship business are reported on IRS Form 1040.

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.

Amount of your reduced Roth IRA contribution

If the amount you can contribute must be reduced, figure your reduced contribution limit as follows.

1. Start with your modified AGI.
2. Subtract from the amount in (1):
3. Divide the result in (2) by $15,000 ($10,000 if filing a joint return, qualifying widow(er), or married filing a separate return and you lived with your spouse at any time during the year).
4. Multiply the maximum contribution limit (before reduction by this adjustment and before reduction for any contributions to traditional IRAs) by the result in (3).
5. Subtract the result in (4) from the maximum contribution limit before this reduction. The result is your reduced contribution limit.

See Publication 590-A, Contributions to Individual Retirement Accounts (IRAs), for a worksheet to figure your reduced contribution.