IRS Form 8880: Who Qualifies for the Retirement Saver's Credit

[Tom in Carolina]

** I am a self-employed individual who receives insurance renewal income and therefore have to pay the self-employment tax (FICA) --> based on the Gross income from Schedule C

** I am also receiving Social Security benefits 

** Married Filing Jointly, our AGI is not more than $41,000

#1 Can I open a SEP-IRA ?

#2 If yes, can I use the Retirement Saver's Credit to reduce the SE Tax mentioned above ?

Many thanks in advance for your help.

Tom

[Tom in Carolina]

Or - can I just buy a regular IRA and still get the Retirement Saver's Credit ?

Thanks again,

Tom

[ThomasM125]

You can contribute to a SEP-IRA depending on the net income of the business. You may qualify for a saver's credit depending on your income and amount contributed to the IRA. Yes, you can contribute to an IRA as opposed to a SEP-IRA and you may still qualify for the savers credit.

@Tom in Carolina 

{Edited 3/30/23 at 2:52 PM PST}

[dmertz]

Given sufficient net earnings, you can contribute to both, but only the first $2000 of contributions is considered for the credit.  The sum of your contributions to self-employed retirement plans, personal IRA contributions and the deductible portion of self-employment taxes is not permitted to exceed your net profit on Schedule C.

[Tom in Carolina]

** Does the “net profit schedule C” get reduced by:

Schedule 1 line 26 = Adjustments to income (SE health insurance, etc)

… in calculating the max contributions to SE retirement plans ?

** Does TurboTax Deluxe: Red Flag or prevent me from entering a contribution to SE retirement plans  higher than “net profit schedule C” ??

… or is that asking too much of TurboTax ?

Many thanks for sharing your expertise over all your years at TurboTax !

Tom

[dmertz · Accepted solution]

For the purpose of determining the maximum contribution to a self-employed retirement plan, net profit is not reduced by the deduction for self-employed health insurance.  It's instead the other way around, the deduction for self-employed health insurance cannot be more than the net earnings that remain after subtracting the self-employed retirement deduction. 

TurboTax will not prevent you from entering an excess self-employed retirement contribution, but it will limit the deduction to the permissible maximum deductible amount.  Any contribution beyond the permissible maximum contribution amount is subject to a 10% penalty on Form 5330.  TurboTax does not support Form 5330.  You'll want to examine the results on the Keogh, SEP and SIMPLE Contribution Worksheet to make sure that your contributions do not exceed the permissible amount.

[Tom in Carolina]

Thanks my friend - your answer is very clear.

Tom