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How much can I contribute to my IRA and 401k?
Old 09-06-2007, 01:12 AM   #1
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How much can I contribute to my IRA and 401k?

I run two small businesses and for this year I have so much in depreciation that my income is small. I might end up showing a much bigger profit than this but it's my best guess at this point.

My income should look something like this.

Business #1 $1,500 taxable income

Business #2 $2,000 taxable income

and maybe $500 in interest for a taxable income total of around $4000

If my final numbers are the same as above I can contribute a maximum of...

$4000 to a roth IRA

$1,500 to a solo roth 401k for my first business

$2,500 to a solo roth 401k for my second business

Does this sound correct or am I messing it up?


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Old 09-06-2007, 07:25 AM   #2
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Old 09-06-2007, 09:41 AM   #3
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I question whether you can contribute to the RothIRA if you use all the self employment income (after self employment taxes) to contribute to the 401ks. See: Compensation Income

"Net Earnings from Self-Employment

When figuring how much compensation income you have to support your IRA contribution, it's your net earnings from self-employment that count. Subtract your expenses and other deductions connected with the activity that produced the income. Also, reduce your self-employment income by the amount you contribute to a retirement plan connected with your self-employment (such as a Keogh plan), and by the deduction for one-half of the self-employment tax."

This is from the Fairmark site, not from the IRS, so I would double check the accuracy.

From IRS publication 590: "Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:
  • The deduction for contributions made on your behalf to retirement plans, and
  • The deduction allowed for one-half of your self-employment taxes.
Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs. When you have both self-employment income and salaries and wages, your compensation includes both amounts."

Publication 590 (2006), Individual Retirement Arrangements (IRAs)

Here is a nice worksheet for figuring out your maximum 401k contribution for the businesses.

No more lawyer stuff, no more political stuff, so no more CYA

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Old 09-06-2007, 10:38 AM   #4
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You can only contribute up to the amount of your *earned* income to an IRA or other retirement plan, so your maximum would be $3,500 in all plans.
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Old 09-08-2007, 01:50 AM   #5
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Thanks kanohe Martha and trirod

I see what trirod is saying and that was my big mistake! I guess you can only be contributing to both if you have enough income to do so.

So I guess my only option is to just put as much as I earn into a roth IRA and wait until next year until I have more income so I can start the 401k's.

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Old 09-08-2007, 09:47 AM   #6
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Seems to me that in your case there are other reasons for sticking with the Roth IRA. Will you be able to find a custodian to set up Roth 401k's for such small amounts? And what will their fees be?
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