Net SE income: Roth 401k, IRA, and health insurance deductions

[sockfight]

Let's say

• you have about $10,000 in net self-employment income (Sch C).
• your healthcare premiums are $10,000, and you're not covered by any other health insurance
• you're married-filing-jointly with a MAGI < $104,000 as per https://www.irs.gov/retirement-plans/plan-participant-employee/2020-ira-contribution-and-deduction-l...

Can you do all of the following?

• Open a solo Roth 401k and contribute $10,000 [presumably leaving S1 ln 15, the line for self-employed retirement plan deducitons, blank as it's a Roth]
• Also deduct $10,000 in healthcare premiums [S1 ln 16]
• Also contribute $10,000 to IRAs (e.g. $6k to yours, $4k to spouse), and if traditional deduct on [S1 ln 19]

It feels too good to be true...

[Critter-3]

Correct ... too good to be true ... you cannot take both.  See the info below on the retirement plan contribution limits and the worksheet for the SEHI deduction ...

 

 

Plan compensation for a self-employed individual

To calculate your plan compensation, you reduce your net earnings from self-employment by:

• the deductible portion of your SE tax from your Form 1040 return, Schedule 1, on the line for deductible part of self-employment tax, and
• the amount of your own (not your employees’) retirement plan contribution from your Form 1040 return, Schedule 1, on the line for self-employed SEP, SIMPLE, and qualified plans.

You use your plan compensation to calculate the amount of your own contribution/deduction. Note that your plan compensation and the amount of your own plan contribution/deduction depend on each other - to compute one, you need the other (this is a circular calculation). One way to do this is to use a reduced plan contribution rate. You can use the Table and Worksheets for the Self-Employed (Publication 560) to find the reduced plan contribution rate to calculate the plan contribution and deduction for yourself.

See line 9 ...   

https://www.irs.gov/pub/irs-dft/p535--dft.pdf

[Critter-3]

Putting into a 401K doesn't necessarily   prohibit you from contributing to an IRA of some kind however your earned income + the fact you are in a 401K may limit the deduction on an IRA or a contribution to a ROTH...

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-contributions

[sockfight]

Thank you for those links. Just had a look. However, if it were a *Roth 401k*, wouldn't the amount on Line 9 of that form (S1 ln 15 - workplace retirement plan deduction) be zero?

What the links you shared seem to boil down to is you can't claim both a 401k deduction and a SEHI deduction on the same money, but with a Roth 401k + SEHI deduction, you're only deducting the money once.

[Critter-3]

True but if you put into a ROTH 401K your income would still be the same on the return since it uses  after tax contributions  ... so technically you can put into both and deduct only the SEHI  on the return  but the ROTH would not be deducted at all.   So again you only get the tax benefit once on the return.

[sockfight]

Right that makes sense. But then you also get the benefits the ROTH provides down the road: tax-free growth and distributions.

Thank you for talking to me about this.