Retirement account contributions

2 replies
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The only income my wife and I have is from my small business. My understanding is that the maximum contribution I can make to my solo 401k, my wife's IRA and my IRA is the net profit of my business. Is this correct?

TurboTax Home & Biz Windows

Opus 17

Level 15

Not quite. In order to equalize the situation between W-2 employees (who pay half of social security and medicare, with the other half paid by the employer) and self-employed (who pay both halves through self-employment tax), there is an additional adjustment. You have to subtract half your SE tax from your net profit. For example, if your net profit is $10,000, your SE tax will be $1530. That means that your eligible "compensation" for contributing to a retirement plan is $9,235.

dmertz

Level 15

Opus 17 is almost right. Yes, your net profit must be reduced by the deductible portion of self-employment taxes. However, Opus 17's example shows an incorrect amount of SE tax. With $10,000 of net profit, SE tax is $1,413, the deductible portion of self-employment tax is $707, leaving $9,293 of net earnings available to support the retirement contributions.