Contributions to Roth 401k and Roth IRA Exceed Earned Income

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Topic Author
MtnBiker
Posts: 294
Joined: Sun Nov 16, 2014 4:43 pm

Contributions to Roth 401k and Roth IRA Exceed Earned Income

Post by MtnBiker »

As I read the IRS limits, it is permissible to exceed earned income with combined designated Roth 401k and Roth IRA contributions.

Example:

Married couple, over age 50, semi-retired, one with part-time job.
Don't need the part-time job income for living expenses.
Gross income = 20K
Earned Income (Gross-HSA-health insurance) (aka SS wages) = 16K
State/Federal Combined Effective Tax Rate = 5%
State/Fed Tax Withheld = 0.8K
SS/Medicare Tax Withheld (7.65%) = 1.224K
Annual Paycheck (Earned - Tax Withheld) = 13.976K

Maximum 2015 Roth 401k Contribution (w/catchup provision) = 24 K
Actual Annual Roth 401k Contribution (Withhold 100% of each Paycheck) = 13.976K

Maximum 2015 Roth IRA Contribution is 6.5K each (w/catchup prov.), or combined self and spousal = 13K (provided have earned income of 13K or more)
Actual Annual Roth IRA Contribution (combined) = 13K

Total Combined Roth 401k and Roth IRA Contributions = 26.976K (exceeds 16K earned income)

This is appears to meet all IRS guidelines. Correct? Did I miss anything?

Thanks for any feedback you can provide.
mhalley
Posts: 8503
Joined: Tue Nov 20, 2007 6:02 am

Re: Contributions to Roth 401k and Roth IRA Exceed Earned In

Post by mhalley »

As long as there is 13 k in earned income, you can contribute 13 k to ira. 401k plays no role.
Mike
Alan S.
Posts: 9971
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Contributions to Roth 401k and Roth IRA Exceed Earned In

Post by Alan S. »

You are correct.

When the 401k deferral is to a Roth, Box 1 of the W-2 will not be reduced by the deferral and also will not be reduced by FICA or taxes withheld. However, the 401k deferral cannot exceed what is available after these other payroll deductions. Therefore, the Roth 401k deferral will be 13.976k.

Taxable compensation left for IRA contributions is the full 16k, but due to the contribution limits being 13k, the most that can go to an IRA is 13k.

Total contributions 26.976k, which as you indicated exceeds earned income. You are making two contributions using the same earned income, which of course is not intuitive.
Topic Author
MtnBiker
Posts: 294
Joined: Sun Nov 16, 2014 4:43 pm

Re: Contributions to Roth 401k and Roth IRA Exceed Earned In

Post by MtnBiker »

Mike and Alan:

Thanks for your replies!

Biker
robertalpert
Posts: 455
Joined: Wed Aug 22, 2007 10:09 pm

Re: Contributions to Roth 401k and Roth IRA Exceed Earned Income

Post by robertalpert »

i am facing a similar issue this year (2017). IS it still true --- can combined contributions to
Roth 401k and Roth IRA still permitted to exceed work-earnings?
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