IRA Contributions Impact on 2019 MAGI for ACA

[Anu]

Dear Tax Experts,

Would really appreciate some guidance in calculating our 2019 MAGI for the Affordable Care Act. We would be eligible to get a Covered CA subsidy, if we could reduce the MAGI by including contributions made to our retirement accounts.

Details:

CA Residents

Married Filing Jointly 2019 Tax Return

No dependents, both over 50 years of age

Not covered by any employer retirement plan

I have 1099-Misc income and W-2 income.

Spouse only has interest and dividend income.

MAGI without IRA contributions: $79,000

If I contribute $9,000 (25% of my 1099 income) to a SEP IRA and $6,500 to a traditional IRA, would these contributions be included to reduce the income when calculating MAGI for the healthcare subsidy? 

Many, many thanks

Anu

@dmertz @TaxGuyBill 

[Critter]

Both are allowed and will reduce your MAGI for the ACA insurance. https://www.healthcare.gov/glossary/modified-adjusted-gross-income-magi/

[dmertz · Accepted solution]

25% of your net profit from self-employment is more than you are permitted to contribute to a SEP plan.  The maximum SEP contribution is 20% of net earnings.  Net earnings are your net profit minus the deductible portion of self-employment taxes.

A traditional IRA contribution will reduce your MAGI for ACA purposes only if the contribution is deductible.  Since a SEP-IRA contribution will make you covered by a workplace retirement plan, deductibility of your traditional IRA contribution will be determined from your filing status and your MAGI for the purpose of deducting the traditional IRA contribution (an MAGI different from the MAGI for ACA).  However, given that you are doing this to qualify for ACA Premium Tax Credits, your MAGI for the purpose of a deduction for a traditional IRA contribution will certainly be low enough to allow the deduction.

You and your spouse can both make a deductible $6,500 traditional IRA contribution provided that you have sufficient net profit from self employment reduced by the amount that you contribute to the SEP-IRA and the deductible portion of SE taxes plus compensation reported on the W-2 to support the traditional IRA contributions.

Note that you could establish a solo 401(k) before year-end and contribute to that instead of establishing and contributing to a SEP plan.  Because a solo 401(k) plan allows employee elective deferrals in addition to employer contributions, the maximum permissible self-employed retirement deduction with a solo 401(k) plan is greater than with a SEP contribution.  However, a SEP plan is much simpler to manage, so if the SEP plan allows a sufficient contribution to get your ACA MAGI to where you need it, a SEP plan might be the better choice.

[Anu · Accepted solution]

Thank you very much for the links and your guidance. This is really helpful for us.

Best wishes

Anu

[Anu]

Thank you @dmertz for such a detailed answer.

Couple of follow up points:

1. Thanks for mentioning that the SEP IRA contribution is a percentage of the net income. I was calculating it on the gross income. :-).  Is this percentage 20% or 25%?

2. Your insight on both (my husband and my) IRA contributions to the traditional IRAs being deductible is extremely helpful.

With gratitude,

Anu

[dmertz]

The maximum permissible percentage of net earnings by a self-employed individual for a SEP contribution is 20%.  Because a SEP contribution is an employer contribution, the SEP contribution itself reduces the amount of net earnings which would otherwise be subject to the 25% limit.  The calculation is described in IRS Pub 560 Chapter 5:  0.25 / (1 + 0.25) = 0.20

https://www.irs.gov/pub/irs-pdf/p560.pdf

[Anu]

@dmertz Thank you very much for your time and guidance.