Self-employed one-person 401(k)

[Guest Judy S]

I have a client with a small business (he is the only employee) who has a self-employed 401(k) plan that provides for deferrals and a 3% employer contribution. Assume he makes $10,000 in 2004 after all deductions. He also made $3,500 in Roth IRA contributions for 2004 (he is 60 years old). He is married and his wife also puts $3,500 in a Roth IRA for 2004. She earns about $70,000 in W-2 salary in 2004.

My question: does the $3,500 Roth contribution have to be included in calculating his deferral and 3% contribution for 2004, so that his $10,000 is divided up as $706-1/2 SE deduction + $3,500 Roth + $5,625 net earned income and deferral + $169 3% employer, or can the $3,500 Roth contribution be considered a spousal IRA so that his $10,000 can be divided up as $706-1/2 SE deduction + $9,023 net earned income and deferral + $271 3% employer? Or, is a different calculation required here? He, of course, wants to shelter as much of his income from taxes as possible.

I'm not very familiar with these rules and would appreciate any help anyone has to give.

[Belgarath]

The ROTH contribution is made from after-tax income, and has no bearing upon the qualified plan calculations.

[Guest Judy S]

I'm not sure I understand. Since the Roth contribution is after-tax, the 1st calculation is the one I must use-he can defer $5,625 and contribute $169, but he must pay taxes on $3,500 of his income. Is the spousal IRA a possibility, or is that negated by the fact that he does have income, expecially income he is sheltering in the 401(k) plan?

[GBurns]

Since the Roth contribution is after tax it is not includable in any of your calculations. The fact that it is after tax also means that it is already included in his income (gross earnings) and cannot be added back in since it already is included in his $10,00 and the wife's is already in her $70,000.

[mbozek]

Since he can deduct up to $16,000 in salary reduction contributions to the 401k plan from his net earnings from SE under IRC 404(n), you dont need to worry about a 3% employer contribution. His max deductible contribution to the 401k plan is 9291 (10,000- fica tax of 709)