I am having trouble understanding the rules about contributing to an IRA when the only earned income is from self-employment and dividends. Situation:
- Married couple filing jointly
- Both taxpayers under age 50
- SE spouse has a solo 401k tied to the business
- One spouse has self-employment income of $48250, other spouse has no earned income.
- Interest income: $4119
- Capital gains and dividend income: $63947
- Self-employment tax deduction (1040 Schedule 1 Line 15): $3409
- Self-employed SEP, SIMPLE, and qualified plans (1040 Schedule 1 Line 16): $31468
SE spouse contributed $22500 to solo 401k as employee and $9148 to solo 401k as employer profit sharing. - Self-employed health insurance deduction (1040 Schedule 1 Line 17): $8135
- Adjusted Gross Income (1040 Line 11): $73,304 (without IRA deduction)
Turbo Tax is suggesting to contribute and take deduction of 2 x $6500 for each spouse's IRA. However, I am concerned that exceeds the earned income (taxable compensation).
So, I'm wondering how much is the earned income (taxable compensation) for purpose of IRA contributions (and deductions). Is it $48250 - (3409 + 31468 + 8135) = $5238? Or, is that modifying the net earnings improperly (see below)?
IRS instructions state that maximum IRA contribution for 2023 is lesser of:
- $6500
- taxable compensation
For self-employment income, Pub 590-A states "compensation is the net earnings from your trade or business ... reduced by the total of:
- The deduction for contributions made on your behalf to retirement plans, and
- The deduction allowed for the deductible part of your self-employment taxes.
Question 1: Is "deduction for contributions made on your behalf to retirement plans" the elective 401k contributions made by the employee or the profit-sharing contributions made by the employer or both?
Question 2: Does the SE net earnings need to be reduced by the Self-employed health insurance deduction (1040 Schedule 1 Line 17) when determining the amount of compensation for purpose of IRA contribution limits?
Thank you for any help you can provide!
