Depositing money made freelancing into a 401k

November 26, 2006 1:44 PM

I have a full-time job at a company that offers a 401k program which I'm currently participating in. I also have some freelance jobs that I'm doing. Is it possible to take all the money I get from my freelance work and put it into my 401k and avoid being taxed on it until I eventually take it out at retirement.

I won't be needing this money anytime soon, it's just excess income, so I figured if I could put it away for retirement and not worry about the taxes on it, that would be great. Is this a good idea? I could put it in a Roth IRA but I feel like that would be confusing since typically you put money in a Roth IRA that's already been taxed but the company that is paying me isn't taking out taxes.

posted by blim8183 to work & money (8 comments total)

#1: You probably can't directly put the money from your freelance jobs into the 401k. You typically only add money to your 401k via pre-tax deductions from your full-time paycheck, or possibly via a rollover from another 401k (or IRA?).

#2: There is a hard limit to how much you can put in a 401k each year -- google for "401k contribution limit". In 2006 it was $15000.

#3: Your employer may have other limits on how much you can contribute -- say, up to 15% of your pay. The details will be in your plan documents.
posted by xil at 2:38 PM on November 26, 2006

I should also add that it's probably a good idea to maximize your 401k contribution if at all possible, then start a Roth IRA and contribute as much as you can to it as well.

Also, you WILL owe taxes on your freelance income at the end of the year, even though the payer did not automatically deduct them for you. It isn't magically tax-free. So, I don't understand why you think putting money in the Roth would cause extra confusion.
posted by xil at 2:42 PM on November 26, 2006

401Ks are typically pretty limited in what you can actually invest in- which is one reason why people roll them over into IRAs once they leave the company.

So what if the company you free lance for is not taking out taxes? Assuming you're reporting the income, the gov't surely will be taking out taxes. Go with the Roth. Or SEP. Or something. Tax avoidance is a citizen's obligation.
posted by IndigoJones at 2:44 PM on November 26, 2006

I think you might be looking for a traditional IRA. With a Roth, you're still obligated to pay the taxes now.
posted by willpie at 4:33 PM on November 26, 2006

You can't put money in a 401k unless it's payroll deduction or a rollover (or employER profit sharing, etc).

You could do a solo-401k if you're really looking to sock away some money. You still have the 15K salary deferral limit (unless you're over 50) but you can do profit sharing contributions to yourself. Run the numbers to pick the right way to put the money away.

A SEP/SIMPLE/IRA might do the trick if you're just wanting to put a few thousand away each year.

Don't count Roth out until you've done some homework. You can even do Roth 401k for your SoloK if you're otherwise ineligible for Roth.
posted by powpow at 5:47 PM on November 26, 2006

Are you maxing out your 401(k) at work? I would guess not, or you wouldn't be asking if you could put more money in it.

If you're not maxing out, start contributing absolutely as much of your salary that you can, and live on some of the freelance money instead of your paychecks. You are definitely subject to the $15,000 limit (IRS) unless you are older than 50.

If your employer has further limits, such as a ridiculous 15% of pay limit, you might suggest they update their plan to remove the percent of pay limit, as allowed now by EGTRRA.
posted by peep at 8:40 PM on November 26, 2006

What you want is called a Solo 401(k) as powpow notes. You can contribute the first $15,000 of self-employment income plus 20% of the amount above $15,000 if you make more than that, up to a total contribution of $44,000. I believe that this limit is ON TOP OF any contributions you make to your main 401(k) through your employer.
posted by kindall at 10:54 PM on November 26, 2006

For the 15k salary deferral they'll combine both Plans. You can do 10k to the outside job and do 5k to your soloK if you want...

EmployER (profit sharing for example) contributions don't count toward that limit, and my understanding is that you can reach the 44k limit in each plan. In other words, you could get 44k into the outside plan and 44k in the solok by creatively mixing/matching the EmployEE and EmployER contributions. If you can make that math work, you're probably making about a gazillion dollars a year. Of course, YMMV. If you're making that much spend a few bucks on a pension consultant to get it right.
posted by powpow at 7:01 AM on November 27, 2006