Software says I have no earned income, hence cannot enter traditional ira, glitch?

[ruskinq2]

married filing jointly, 5 individual schedule C businesses, some with profits, some with losses, but each of us has an overall profit in our Schedule C totals, that is greater than the 7000 threshhold for earned income for ira contribution, including the 1/2 SE tax. Is there anything else that gets deducted to calculate earned income? Software shows for the max SEP deductible contributions allowed net earnings which are minus the 1/2 SE of 15,782 and 23,329 for us, which should be enough earned income for the ira contribution, this is all business income. We both did large mega Roth conversions from our 401Ks most of which was taxable, these are not part of this income, and are in addition too.

Any idea what could be jinxing this? thx!

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[VolvoGirl]

Are you trying to enter a regular IRA contribution or  SEP contribution?  SEP goes in  different place.

The calculation for a self-employed person for a SEP IRA contribution is different than the straight 25% of net income.

Per the IRS:

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.

Go to Federal

Income

Scroll down to Other Business Situations

Self Employed Retirement Plans

@dmertz could he be over the max AGI for a large convert to ROTH IRA?  

[dmertz]

There is no MAGI limit for being eligible to convert to Roth.  Given participation in a workplace retirement plan, the Roth conversion would increase the MAGI for the purpose of determining whether or not a traditional IRA contribution was eligible to be deducted, but the title of this thread indicates that TurboTax said that income to support an IRA contribution was zero.

As mentioned above, deductible self-employed retirement contributions reduce the amount of compensation available to support an IRA contribution.  Excluded foreign-earned income also will not support an IRA contribution.

[ruskinq2]

thx all for your help on this...I stripped out all of the 401K contributions, and the program allowed the traditional iras and deduction thereof. The Roth rollover was 179K (159K taxable) split between us two...so from schedule 1 earned business income is 69K from schedule C's, minus 2K other losses from business asset disposals, minus 27K (schedule E loss from a different partnership with K-1's) makes total of about 39K as income that they seem to base as "earned income"  for calculating IRA earned income? (line 8 on 1040)? I thought only the Schedule C incomes were the "earned income", but not so?

From 1040 total income 202K, AGI 171K, taxable income 131K. Is the loss from schedule E reducing business income for purposes of qualifying income for IRA?

I want to maximize all retirement contributions so I don't want to miss the IRA, if I can help it, but i need to look at max total contributions possible (note, the trad IRA contribution does not need to be deductible). The Solo 401K I have has multiple buckets, Pre-tax 401K, after-tax Roth 401K, and voluntary after tax 401K. 

Do you know of an online calculator that can calculate the optimum combination for max contribution taking into account the IRA earned income limitations, or how I can configure the contribution worksheet in turbo tax to do this? thx in advance

[dmertz]

The results seem to suggest that you net earnings are low enough that, if you are maxing out the permissible deductible elective deferrals to the solo 401(k), not only are you ineligible to make IRA contributions, you are also ineligible to make Roth and traditional after-tax contributions to the solo 401(k) because all of your net earnings have been consumed by the deductible portion of SE taxes and the elective deferrals.

Note that Roth and traditional after-tax contributions to the 401(k) do not reduce the compensation available to contribute to an IRA, only deductible contributions to the solo 401(k) do.  It seems that maximum retirement contributions would result from each contributing at least $7,000 as a Roth 401(k) contribution (assuming that each of you have at least $7,000 in net earnings) and $7,000 each to IRAs, then contributing the remaining net earnings as either traditional elective deferrals or Roth contributions to the solo 401(k).

[ruskinq2]

thx for help...using the 401 worksheet calculator in the program, I entered a combo of 401K pre-tax and 401K Roth up to what the calculator said the net earnings were (which btw deducted the K-1loss) Traditional IRA's are maxed at 7K each. Is it correct that the catchup contributions are in addition to the earned income limit?

[KristinaK]

Are you asking if the catch-up contributions are not subject to the requirement of having sufficient earned income? 

[ruskinq2]

Yes, thank you...that is correct...

[dmertz]

Catch-up contributions are limited by earned income.