SIMPLE, SEP IRAs reduction of compensation of self-employed person for Roth IRA contribution
Suppose that a person has $8,000 in net income from self employment, but no regular job. He can defer most of this amount to a SIMPLE IRA, but cannot also contribute $6,000 to Roth IRA because his compensation is reduced by SIMPLE or 401(k) deferrals? Is his compensation reduced by a SEP contribution if he has a SEP instead of a SIMPLE? From page 6 of Publication 590-A:
Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:
• The deduction for contributions made on your behalf
to retirement plans, and
• The deduction allowed for the deductible part of your
self-employment taxes.
My inclination is that the answer is “Yes.”
Permalink Submitted by William Tuttle on Mon, 2020-12-21 06:24
Any pre-tax employee deferrals and/or employer contributions to any self-employed employer retirement plan deducted on Form 1040 Schedule 1 Line 15 reduces IRA compensation. This is true regardless whether it is a DC (one-participant 401k, SEP or SIMPLE IRA) plan or DB plan.