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My yearly maximum contribution to solo 401k is $6000 after $13000 contribution to Simple IRA on W2 position. This year I expect to earn less than $6000 from the side job. Can I contribute all profits after expenses since I still contribute less than my yearly limit? Then what is tax consequence? Do I have to pay self employment tax first based on the profit, then make solo 401k contribution with the money left?

  • Why does the amount that you're earning make a difference in how you handle things? – RonJohn Sep 25 at 15:53
  • @RonJohn Among other things I believe most retirement accounts dont allow one to contribute more than yearly earnings. – Vality Sep 25 at 15:57
  • @Vality right. And his profits will be less than his earnings, so that is not a concern here. – RonJohn Sep 25 at 15:59
  • IRS rules that self employed can contribute 100% of compensation as long as it is less than yearly limit. When I make less than yearly limit, I contribute 100% of profit , then I have no money left to pay tax if I owe. – soodala2k Sep 25 at 16:05
  • This is the copy of IRS website:The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both: Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit: $19,000 in 2019, or $25,000 in 2019 if age 50 or over ($18,500 in 2018, or $24,500 in 2018 if age 50 or over); plus Employer nonelective contributions up to: 25% of compensation as defined by the plan, or for self-employed individuals – soodala2k Sep 25 at 16:07
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The self employment tax is before the 401k deduction. However, you mentioned this is your side job, but did not specify your income from you main job. The value of the tax savings from your deduction you get for your traditional 401k contributions is based on your total personal income tax, and the way your business is organized determines how its income flows into your personal income. Note, if your total personal income is low enough you may want to consider a Roth 401k since the tax deduction from a traditional 401k might not be worth taking now.

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