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11-12-2017 12:21 AM
Hi H&R forum. I have regular income from a normal salary job (with no 401k), and I also have 1099-related sole proprietorship for book royalties. My question is: can I start and contribute to a solo-401k for the income I receive from royalties?
A bit of background context:
The royalties vary from year to year, but tends to be in the ballpark of 15-25k per year. I don't need that money as income (I'm far from rich, but my regular job is enough to cover all of my life expenses), and in the past I've been reporting it as income and then putting it into RothIRA and then the rest into a normal mutual fund. But now I think it would be more wisely spent if I could put it in a 401k, otherwise it gets taxed as income and then I pay tax on the mutual fund earnings. So now my idea is to put up to 18,500 of the royalties in a solo-401k as "employee" and max out anything above that as self-employer contribution. Everything I've read about this online seems to assume that all of one's income is from self-employment. For me, about 25% of my income is self-employment and the rest is a normal income from a university.
Thanks in advance!
11-12-2017 04:44 PM
Welcome to the H&R Block community.
For both 401(K) accounts & IRA accounts you cannot contribute more than your earned income or whatever the set contribution limit is for the account, whichever is less. So for example, for a 401(K) if your earned income is $12,000 then you can contribute a maximum of $12,000 because $12,000 is less than the set dollar limit of $18,500 per account ($53,000 over all 401(K) accounts). That's what will keep you from contributing more in this situation. Royalties are passive income, not earned income. If you put the royalties into a qualifying retirement account you'll end up with a big penalty unless you withdraw them before the tax deadline. You can however put some of the royalties into an account, up to what your earned income totals (your maximum allowed contribution).
A Roth IRA, which you said you have, does not have a minimum required distribution date, so you can keep funding it indefinitely for as long as you are alive and your funds will keep growing. Yes, you will pay tax on funds that haven't been taxed yet when you earn or receive them, but you will be able to withdraw money from the Roth account 100% tax free later on. If you expect your income to be greater in your later years, whether it be from retirement or royalties, or whatever else, then you may want to keep the Roth account because with a greater income later on you'll pay more tax if you deposit the funds into another type of account pre-tax then you will if you pay the tax now as you earn the money.
On the other hand, if you want to put everything in a 401(K) then if you move the funds from the Roth account to the 401(K) those funds are still not taxable and your distributions later on will only be partially taxable until the money that you already paid tax on it used up.
If you have any other questions I'll be glad to help.
Senior Tax Advisor (Tampa, FL)