SE-401K and deductable Traditional IRA ?


T

Thunderbird

I wanted to check/confirm if the the self-employed 401K (used by non
incorporated sole prop Sch-C business) is treated the same as a normal
employer sponsered plan in terms of determing the deductability of a
traditional IRA contributions. In other words a someone with a MAG <
56K can deduct both the full 401K contribution plus the IRA
independent of where the income came from.

E.g. 2011 Tax Return Example:
70000 in Schedule C income (only income source)
(assume zero other deductions for simplicity).
16500 to self employed 401K (1040 line 28)
-------------------------------------------------
MAGI = 53500 therefore fully deductable trad IRA
5000 to Trad Ira (1040 line 32)
=======================
21500 In fully deductable retirement contributions (401K + IRA)
allowed.


Is this correct ? Note that I assumed the SE-401K (line 28) deduction
is not added back to compute MAGI.
On a similar note, is it true/false the MAGI IRA threshold (56K)
test is computed before the IRA deduction (line 32) it is trying to
vadidate is included? In other words AGI must be < 56K before
entering anything into 1040 line 32 for full IRA deductability?

Note that I also realize that you can also contribute profit sharing
to the SE-401K (more than the deferal limit of $16.5K) , but I wanted
to keep the example simple.
 
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A

Alan

I wanted to check/confirm if the the self-employed 401K (used by non
incorporated sole prop Sch-C business) is treated the same as a normal
employer sponsered plan in terms of determing the deductability of a
traditional IRA contributions. In other words a someone with a MAG<
56K can deduct both the full 401K contribution plus the IRA
independent of where the income came from.

E.g. 2011 Tax Return Example:
70000 in Schedule C income (only income source)
(assume zero other deductions for simplicity).
16500 to self employed 401K (1040 line 28)
-------------------------------------------------
MAGI = 53500 therefore fully deductable trad IRA
5000 to Trad Ira (1040 line 32)
=======================
21500 In fully deductable retirement contributions (401K + IRA)
allowed.
True.



Is this correct ? Note that I assumed the SE-401K (line 28) deduction
is not added back to compute MAGI.
True.

On a similar note, is it true/false the MAGI IRA threshold (56K)
test is computed before the IRA deduction (line 32) it is trying to
vadidate is included? In other words AGI must be< 56K before
entering anything into 1040 line 32 for full IRA deductability?
MAGI = AGI + student loan interest deduction + tuition/fees deduction +
foreign earned income & housing deductions + IRA deduction + excluded
savings bond interest + excluded employer adoption benefits + domestic
production activities deduction.

See page 16 of IRS Pub 590 for a worksheet you can use to compute MAGI.
 

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