Can I Have a Self-Employed 401(k) & a Roth IRA?

Both Roth IRAs and self-employed 401(k)s offer tax-sheltered growth.

Both Roth IRAs and self-employed 401(k)s offer tax-sheltered growth.

If you’re self-employed, you can boost the amount you can stash away in qualified retirement plans by using both a Roth IRA and a self-employed 401(k). For the purposes of annual contribution limits, a self-employed 401(k) plan is treated the same as a 401(k) plan through an employer.

Maximum Contributions

Your contributions to a Roth IRA do not affect your ability to contribute to a self-employed 401(k) plan. For example, as of 2011, you can contribute up to $5,000 ($6,000 if you are 50 or older) to your Roth IRA and $50,000 ($55,500 if you are 50 or older) to your self-employed 401(k) plan. Assume you’re 50 or older and meet the criteria to contribute to both plans: If you put the full $6,000 in your Roth IRA, you could still contribute the full $55,500 to your self-employed 401(k).

Compensation Requirement

To contribute to either a self-employed 401(k) plan or a Roth IRA, you must have compensation equal to or greater than your contributions. According to IRS Publication 590, self-employment income counts as compensation, so as long as you have a net profit for the year from your self-employment, you qualify to make the contribution. However, your contributions cannot exceed your compensation for the year.

Roth IRA Income Limits

Roth IRAs also limit your ability to contribute annually based on your modified adjusted gross income. If your modified adjusted gross income is too high, you can’t contribute to your Roth IRA. The income limits differ based on your filing status. For example, if you’re married filing a joint return, the limit is significantly higher than if you file a single return. You can find the current limits in IRS Publication 590.

Self-Employment Profits

For your self-employed 401(k) plan, your contributions cannot exceed your net self-employment income, even if you have other compensation. For example, say you work as an employee and make $100,000 and you have $10,000 of self-employment income. You could only put a maximum of $10,000 into your self-employed 401(k) plan because your $100,000 of other income isn’t income from your business. However, you can still contribute some of that $100,000 to a Roth IRA.

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