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I'm in a unique situation this year where I worked self-employed 1099 for a few months and am full time W-2 for the rest. My full time job does not offer a 401k, but I can open a self-employed 401k on my own that means. The limit is bound by my net profit for the 1099 portion, plus a small profit sharing amount. It would offset the Schedule-C taxes, but still require the 15.3% self employment tax on that income.

I will also be under the Roth IRA income threshold, so will likely take full advantage of that regardless.

Lets say my 1099 income amounts to about 15k, and I plan to contribute as much as possible of that to the 401k, essentially funded by the larger W2 income when spread over the year. My question comes from how possible deductions against the 1099 income take away from possible 401k contributions.

If I have 15k possible 401k money, and 3k deductions, I am now only allowed to contribute 12k to 401k if I take the deductions in full. That means a smaller retirement contribution for the year, but also that the 3k is still untaxed AND doesn't have self employment tax. The latter seems reasonable by the math, but also means the money is non-retirement, and may not last the 30 years of savings will-power.

So which is best overall? Apply as many deductions as exist but reduce my retirement contribution, or voluntarily skip deductions to max out the possible retirement contribution?

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  • You can contribute up to 17,500 to your 401k. I'm currently looking into this myself, from what I understand you would be able to contribute your full 15k from 1099 income and then have 2,500 left over that you could contribute from your W2 income
    – Andrew Walters
    Commented Aug 18, 2014 at 16:43
  • I believe the self-employed 401k is limited by the net profit still, but my overall contribution (assuming I somehow had two 401ks) would be the 17500, and I'd have 2.5k left in that situation.
    – Miro
    Commented Aug 18, 2014 at 16:53

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Apply as many deductions as you are legally entitled to. Those are taxes you may never ever pay.

Then turn around and put any more monies above the maximum retirement contributions into a taxable account. But this time invest in tax efficient investments. For example, VTI or SPY will incur very minimal taxes and when you withdraw, it will be at lower tax rate (based on current tax laws). Just as you diversify your investments, you also want to diversify your taxes.

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