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If an individual has net earnings from self-employment of $3000 and he contributes $3000 to a Roth 401(K) can he also contribute to a traditional IRA? That is, does the contribution to the Roth 401(K) reduce his ability to put money in his IRA?

If it was a traditional 401(K) then he could not put money into his IRA. With a Roth 401(K) I am thinking he can because that is the way the form works out. However, it does not seem right to me. It also goes through Turbo Tax but I not yet tried it for this year.

Please assume that the $3000 of income is all the earned income the person has. Also assume that the person has an AGI of over $50,000.

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  • By the way, anyone with more than minimal income, no matter if they have contributed to a 401(k) and what their income is, can contribute to Traditional IRA (up to the annual contribution limit of $6000). You may be referring to the fact that they cannot deduct Traditional IRA contributions if they or their spouse contributed to 401(k), and their income is above a certain level.
    – user102008
    Jan 17, 2021 at 19:04
  • If you wish to have both pre-tax and post-tax retirement plan contributions in a year, a more feasible way to do it would be to contribute pre-tax to Traditional 401(k), and then use Roth IRA for your post-tax contributions (potentially backdoor Roth IRA contribution if your income is high).
    – user102008
    Jan 17, 2021 at 19:07
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    oh sorry I misunderstood the question
    – user102008
    Jan 17, 2021 at 21:33
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    Worth noting that you could actually only contribute $2,788 to either due to the self-employment tax deduction.
    – Craig W
    Jan 17, 2021 at 22:21
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    It is 3000 - 0.5 * 3000 * 0.9235 * 15.3%. This is the deduction for one-half of the self-employment tax. Profit or net earnings from self-employment is generally quoted before this deduction. Every Solo 401(k) calculator I have seen, e.g. this one, accounts for this deduction.
    – Craig W
    Jan 17, 2021 at 23:16

1 Answer 1

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In your example, your compensation is so low (below $6000) that it becomes the limiting factor for how much you can contribute to IRAs. In Publication 590-A, the limit (here for 2019) for how much you can contribute to Traditional IRA is the lesser of $6000 and your "taxable compensation" for the year. So your question is basically whether a Roth 401(k) contribution reduces your "taxable compensation".

Taxable compensation is defined in the section "What Is Compensation?" (here for 2019). It doesn't explicitly talk about how Traditional and Roth 401(k) contributions affect the calculation of taxable compensation, but it seems like pre-tax Traditional 401(k) contributions would reduce the taxable compensation, but Roth 401(k) contributions wouldn't. For one, it says wages are considered compensation, and the IRS treats any amount shown in box 1 of the W-2 to be wage compensation. Pre-tax Traditional 401(k) contributions would reduce box 1 of a W-2 (if you were a W-2 employee), whereas Roth 401(k) contributions would not reduce box 1. In addition, in "What Isn't Compensation", it includes "any amount you exclude from income", which would include pre-tax Traditional 401(k) contributions but not Roth 401(k) contributions.

So I think that in your example, the person still has $3000 of "taxable compensation", even after a $3000 Roth 401(k) contribution, and thus can still make a $3000 Traditional IRA contribution.

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  • I tend to agree with you. However, depending on person's AGI ( or strictly speaking MAGI ) they may be ineligible to make a Roth IRA contribution.
    – Bob
    Jan 17, 2021 at 22:16
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    @Bob: Okay I'll limit the statement to Traditional then.
    – user102008
    Jan 18, 2021 at 2:09

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