I've read through quite a few of the existing discussions on Solo 401k on this forum. Brilliant stuff. However, I have a very specific question regarding allowable contributions to the Solo 401k.
If I have a side business (outside of my regular day job) as a sole proprietor, do I need to limit my contributions to my Solo 401k to the income or profit from my business? For example, if I make $10k in revenue from my side business, can I only contribute up to $10k into the Solo 401k? Or am I able to contribute, say $40k (income from other sources) so that I can maximize my Solo 401k while deferring taxes on the extra $30k contribution?
Nitin, you can only contribute to the Solo 401k from the earnings of your side business.
Thanks @Dmitriy Fomichenko . Do you know if this limit also applies to rolling over an IRA into a Solo 401k ? i.e. Is the rollover amount also capped at the earnings of the side business?
No it does not, as any amount can be transferred from the following accounts types to a solo 401k plan.
- Traditional IRAs
- SEP IRAs
- Rollover or Conduit IRAs
- SIMPLE IRAs
- SIMPLE 401(k) Plans
- 401(k) Plans
- Profit Sharing Plans
- Money Purchase Pension Plans
- Defined Benefit Plans
- Government 457(b) Plans
- 403(b) Plans
Now that's music to my ears :)
Thanks @Mark Nolan
You have George W. Bush to thank for that.
In regards to this statement...
"Nitin, you can only contribute to the Solo 401k from the earnings of your side business"
When you say earnings, is that gross or net? I.e. I take a loss annually on a rental property due to depreciation, so it looks like I have no earnings.
Contributions to Solo 401k are based on the net income. If there is no profit in your business you can't contribute to a retirement account.
Also, rental property income is passive, you need earned business income to contribute to a Solo 401k plan.
Another item to keep in mind is that all of your self employment income from all sources can be aggregated for purposes of contributing to the Solo 401k.
Here is an except from an article written by Calcpa.org
When a self-employed individual maintains more than one trade or business, the question
arises as to whether the limit is based on the sum of earned income or loss from all trades or
businesses under common control [as defined in IRC 414( c)) as modified by IRC 415(h)], or if
only the trade or business maintaining the plan being tested is used.For purposes of the IRC 415
limit, earned income for the self-employed individual is based on the sum of the earned income
from all the controlled trades or businesses, regardless of whether the related employer maintains
a qualified plan [Reg. 1.415-2(d)(6)].
EXAMPLE: Andy, a sole proprietor, operates a law practice as a sole proprietor
and has $100,000 of self-employment income from such practice for 2008 (prior to
the reduction for one-half of self-employment tax). Andy also operates another
business that incurred a loss of $90,000 in 2008. Andy renders personal services in
operating both businesses, but only the law firm has adopted the qualified plan.
How is Andy’s IRC 415 limit calculated for the law practice’s qualified plan?
Andy’s IRC 415 limit is based on 20% of the combined income of $10,000
($100,000 – $90,000), less the ½ self-employment (SE) tax.
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