Do I need to subtract my self-employed health insurance deduction from my Solo 401k after-tax contribution?
Hi community members,
I’m a sole proprietor with a Solo 401k plan. I also have a day job, and maxed out the $19,500 employee deferral contribution (pre-tax) there.
To take full advantage of the $57,000 overall contribution limit in 2020, which is per plan, I would like to max out my voluntary after-tax contribution (i.e., not a Roth contribution) to my Solo 401k.
To do so, I’ve taken my net income – 1/2 of my self employment tax = $46,475. (I’m not making any employer profit-sharing contributions to the plan.)
I was all ready to make my after-tax contribution for 2020, but my CPA just told me I now need to subtract my $6,414 self-employed health care deduction from that amount first, so that my max contribution amount is $40,060.
Is this correct?
Since the SEHI deduction isn’t on Schedule C, I didn’t think it impacted the amount I could contribute to the Solo 401k, but I’d love to hear the reasoning why it does if this is the case.
Either way, I’ll be happy. If I do need to subtract the SEHI deduction, I’ve just avoided over contributing. If not, I can contribute the full amount. Both are positive outcomes. Looking forward to hearing your thoughts.
Permalink Submitted by William Tuttle on Thu, 2021-05-13 19:49
It is the other way around and only applies to pre-tax traditional deferrals and employer contributions.
See the Self-Employed Health Insurance Deduction Worksheet—Schedule 1, Line 16 in the IRS Form 1040 instructions.
Your self-employed health insurance deduction is <= your Schedule 1 (Line 3 business profit – Line 14 1/2 Self-Employment Tax deduction – Line 15 Self-Employed SEP, SIMPLE, Qualified Plan deductions).
Post-tax Roth deferrals and employee after-tax contributions have no effect on the self-employed health insurance deduction and vice versa.
The fact that a CPA doesn’t know this and can’t find it in the Form 1040 Instructions, pretty much indicates they are not competent enough to help self-employed individuals with their taxes.
Keep in mind, if you are eligible for the qualified business income (QBI) deduction. The 1/2 SE tax and self-employed health insurance deductions reduce your QBI and QBI deduction.
Permalink Submitted by Joseph Bousquin on Thu, 2021-05-13 23:29
Thanks, Spiritrider, I was hoping you might see this. Great, pertinent advice as always. As I’ve navigated the Solo 401k process, I’ve been at a loss to find the definitive IRS guidance for calculating the maximum allowed contribution to a Solo 401k. The Finance Buff’s spreadsheet does a great job on its own, but I’d love to see the math behind it. Do you have any links, or combination of links, that show exactly how to determine the maximum allowed contributions across the employee deferrals, employer contributions, Roth and after-tax buckets of Solo 401k? Thanks again.