Funding a Roth IRA

Today TaxMama hears from Dennis in Texas who tells us, “My wife and I are both self-employed, and we’re both the only employees in our companies. We would both like to start ROTH’s, because we would like to be able to withdraw contributions, without penalty, if an emergency came up. We file jointly and our combined gross sales will be $175,000 this year and our expenses will be $30,000. Are we excluded because of the ROTH “earnings” limitation?”

Dear Dennis,

If your profits remain under $150,000, you’ll be eligible to contribute to the Roth IRA.

When you’re married, your right to contribute phases out when your joint modified AGI is between $150,000, and $160,000.
Here’s an even better option, especially if you want to access your funds, without cost or penalty, you have two other options. And you don’t need to worry about phase out limits.

1) Solo-401(k) – which will let you each contribute up to $44,000 in 2006. And you may borrow up to 50% of your contributions, up to $50,000, whichever is less, from each of your Solo-401(k) accounts, whenever you need money.

This means you draw the money tax-free, no penalties, no problems – and you pay yourself back.

1) Roth Solo 401(k) – The Economic Growth and Tax Relief Act of 2001, which made it possible for companies to offer a ROTH option within a 401(k), also made it possible to do the same thing with a solo-401(k). It allows each of you to designate up to $15,000 worth of your contributions as ROTH contributions ($20,000 if you’re 50 or over).

Your business must open up a separate Solo 401(k) account for each of you. As you make
the contributions, you designate whether you want the funds to be regular retirement funds or Roth funds – up to the Roth contribution limits.

I found an article on the Equity Trust Company’s site that does a decent job of explaining all this. (Note: This is not a company with which I’m familiar. It was just a good article.)

Don’t worry, the annual administrative costs are very reasonable – about $100 for each account.

And remember, you can find answers to all kinds of questions about Roth IRAs and all kinds of other tax issues, free. Where? Where else? At

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips. Please click on the subscribe link and join us.]

To make your comments, please visit TaxMama’s Parlor at

  • Ask TaxMama :: Where taxes are fun and answers are free
  • :: Where TaxQuips will be moving & You can add your comments
  • Equity Trust Company :: New Roth 401(k) Allows Contributions Up to $20,000 with NO Income Limits

File Download (2:16 min / 0.5 MB)

Leave a Reply