Maximizing solo 401k contribution

Forum|Forum|2 years ago
January 5, 2024
2 replies
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I want to maximize my 401k contribution, but I want to prioritize my self employment health insurance premiums deduction over the 401k. When I check the Maximize 401k Contribution box, it decreases my health insurance premiums deduction. Is there a way that I can take the full health insurance deduction and have Turbotax automatically calculate what the max 401k contribution would then be?

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Best answer by dmertz

Since you've already made the maximum permissible IRA contribution you can ignore my suggestion to make such a contribution. With a $10,000 self-employed health insurance deduction you have sufficient compensation to support the IRA contribution since $8,000 of that $10,000 is doing double duty. The IRA contribution therefore has no effect on the amount that you can contribute to the 401(k) while still keeping the $10,000 self-employed health insurance deduction.

Fidelity's self-employed 401(k) plan does not include a designated Roth account so no Roth contribution can be made to that plan.

There can't also be a SIMPLE IRA plan and there is no point to a SEP plan since the maximum permitted employer contribution to the SEP plan would be the same as the maximum permitted employer contribution to the 401(k) plan.

Anonymous_

Level 15

I'll page @dmertz for this and your other question.

dmertz

Level 15

TurboTax cannot do that automatically.

I do exactly the same since the amount deductible for self-employed health insurance will never be taxed while the amount deducted for 401(k) contributions is only tax-deferred. You yourself will need to subtract your self-employed health insurance premiums and the deductible portion of self-employment tax from your net profit and contribute only what remains of the net profit. You won't be able to use the Maximize box to calculate this.

If your 401(k) plan supports Roth contributions, you could use the same compensation for which you receive the self-employed health insurance deduction to make a Roth contribution to the 401(k).

You might also consider contributing to an IRA an amount equal to the self-employed health insurance or the annual IRA contribution limit, whichever is less. The same compensation for which you get the self-employed health insurance deduction will support an IRA contribution. MAGI will determine how much you are eligible to contribute to a Roth IRA or how much of a traditional IRA contribution might be deductible.

hesformesAuthor

Level 3

Thanks for your thorough reply. I'm not sure I understand all of what you said. I have already contributed the full $8k to my personal, non-business traditional IRA. I don't know if that affects what you said about IRAs. I'm assuming I can't contribute any more to any IRA, but I hope the 8k already contributed doesn't affect what I can do with the 401k as you described above. Also to make sure: If I contribute the maximum to my 401k minus the 10k for insurance premiums, are you saying I can contribute the 10k to a Roth 401k? If so, could that also be a SEP or Simple IRA? I'm not sure Fidelity has a Roth 401k.

dmertz

Level 15

dmertz and hesformes, Thank you!

I think you've answered this question but I just wanted to confirm: Is it OK to take a $16K insurance deduction, and also put $20K into my spouse's individual (traditional) 401k in order to get a $36K deduction on schedule 1? My goal is to minimize the amount of additional taxes that I have to pay this year. Although Turbotax allows this $36K deduction on schedule 1, it doesn't seem mathematically right to take a $36K deduction based on $20K in earnings.

Thanks again!

"Is it OK to take a $16K insurance deduction, and also put $20K into my spouse's individual (traditional) 401k in order to get a $36K deduction on schedule 1?"

No. The sum of line 16 and line 17 is not permitted to exceed the $20,000 of net earnings. The sum of lines 15, 16 and 17 is not permitted to exceed net profit.

The maximum possible deduction on Schedule 1 for these items would be $35,000 as follows:

Line 16: $4,000

Line 17: $16,000

Line 20, $15,000 if you were both over age 50 in 2023 and MAGI is below $116,000, (a $7,500 traditional IRA contribution each)