Question about contributing to both Roth IRA and Self-Directed 401(k) plans

Forum|Forum|2 years ago
January 13, 2024
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Hi guys, I have two different accounts: one is a Roth IRA with Acorns, another is a self-directed solo Roth 401(k) plan with Vanguard. If I made $10,000 NET profit in the year of 2023 being self-employed, can I contribute the maximum to the Roth IRA with Acorns ($6,500) and another $10,000 to the self-directed solo Roth 401(k)? Or can I only contribute a maximum of $10,000 total between both accounts?

Basically wondering if the NET profit requirement for contributions to these accounts applies to each account individually, or all retirement accounts collectively.

Thank you for any information!

Not A Product Question

Best answer by dmertz

Assuming that you are a sole proprietor do not have another job which would cause to to max out the Social Security wage base, with $10,000 of net profit you have only $9,293 of net earnings. Net earnings are net profit minus the deductible portion of self-employment taxes.

With $9,293 of net earnings you can contribute $9,293 as a Roth contribution to a 401(k) and $6,500 to the Roth IRA. Only deductible 401(k) contributions reduce the amount of compensation available to contribute to a Roth IRA, so the same dollars used to support the Roth 401(k) contribution can be used to support the Roth IRA contribution.

dmertzAnswer

Employee

SomeGuyOnTheWebAuthor

@dmertz thank you for this. I have a question which I may have asked you before but need a little clarification if possible please: in a scenario where my tax return shows a NET income of just $1,000 for a given tax year, what happens if I deposit $6,500 into my Roth IRA despite only making $1,000 in NET income? Will I be forced to withdraw the funds from the account, will the funds be double taxed, both or something else? Thank you for any information on this.

ThomasM125

You will face a penalty of 6% times your excess contribution to a ROTH IRA. If you contributed $6,500 to a ROTH IRA and your income was $1,000, your excess contribution would be $5,500. You will pay a 6% penalty on that amount every year until you correct the excess contribution, either by removing the funds from the retirement account or by earning enough net income to allow for the excess contribution.

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