41.1 Overview of Retirement and Medical Plans

Self-employed individuals can shelter income and obtain desired retirement savings and health coverage using various plans. While the plans are tied to being in business, the deductions for them are not business write-offs. Instead, deductions for the self-employed person’s own coverage are claimed directly on page 1 of Form 1040. For example, a self-employed person’s deductions for contributions to his or her own account in a Keogh retirement plan (41.2), SEP (41.3), or SIMPLE IRA (41.9) are claimed on Line 28 of Form 1040. If the plans also cover employees of the self-employed person, deductions related to employees are claimed on Schedule C.

Self-employed individuals who obtain their own health insurance can deduct the premiums from gross income, rather than as an itemized medical expense (12.2). They may be able to cut the high cost of health coverage by using a high-deductible health plan, combined with a health savings account (HSA) (41.10). Contributions to the HSA are also deductible from gross income (41.11). Alternatively, self-employed individuals who have previously set up Archer MSAs can continue to use these tax-advantaged accounts to pay for medical costs not covered by insurance (41.13).

Planning Reminder

Employees Who Are Self-Employed on the Side

If you are an employee-member of a company retirement plan, you may set up a Keogh plan if you carry on a self-employed enterprise or profession on the side. For example, you are employed by a company that has a qualified 401(k) plan to which you make salary deferrals. At the same time, you have a sideline consulting business. You may set up a Keogh plan based on your consultant earnings. Each plan is independent of the other. As an alternative to a Keogh plan, you may contribute to a simplified employee pension plan (SEP), (41.3), or a SIMPLE IRA 41.9.

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