QUESTION:
Maximum Allowable Contribution: I will have paid $1580 in dental insurance premiums for a policy associated with my LLC business that is taxed as a sole proprietorship. Can I confirm what my maximum pre-tax 401k contribution is for 2024, while preserving the deductibility of my $1580 self-employed medical insurance premiums?
ANSWER:
For self-employed individuals, including sole proprietors, the IRS allows the deduction of health insurance premiums, which encompasses dental insurance, as an adjustment to income. Therefore, solo 401k contributions for a sole proprietor whose business sponsors a solo 401k are may be impacted by dental insurance premiums depending on the solo 401k contribution type. Dental insurance premiums for a sole proprietor who sponsors a solo 401k are not reported on Schedule C. Instead, they are claimed as an adjustment to income on Schedule 1 (Form 1040) line 17-“self-employed health insurance deduction”. Contributions to the solo 401k are based on line 31 of the Schedule C– “net profit”. When making employee Roth solo 401k contributions or voluntary after-tax solo 401k contributions health insurance premiums premiums do not impact those contribution types. However, pre-tax contributions (both employee and employer as well as employer Roth) are impacted.
QUESTION:
Catch-Up Contributions: Am I allowed to make the full catch-up contribution of $7,500 for 2024 in addition to the amount calculated above (I’m 58 years old), even though the total will be greater than my Schedule C bottom line?
ANSWER:
You cannot contribute more than you make in earned income from your self-employed business. The starting figure for solo 401k contributions where the self-employed business is taxed as a sole proprietorship is line 31 of their Schedule C. You then subtract 1/2 of self-employment tax from this figure to calculate the amount that may be contributed to the solo 401k. Visit here to use our on-line solo 401k contribution calculator. After you plug in the line 31 schedule c figure the calculator will perform the solo 401k contribution amounts for you.
