Contribution limits to Roth IRA and 401(k) with small earned income

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MathIsMyWayr
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Location: CA

Contribution limits to Roth IRA and 401(k) with small earned income

Post by MathIsMyWayr » Wed May 23, 2018 2:29 am

I have a question on how much a married couple can contribute to Roth IRA assuming their taxable income is below the Roth IRA cutoff limit. For example, they are over age 70 and have an earned income of $10,000 from a part time work or consulting. They can pay tax from other fund and do not need this income for living.
  • Do they have to exclude FICA tax, $765 (6.2%+1.45%) for W2 income or $1,385 (12.4%+1.45%) for 1099 income?
  • If so, there remains $9,235 in the case of W2 income. Can they contribute the max Roth IRA, i.e., $6,500 each? Or, is the combined contribution capped at $9,235?
  • Continuing from the case above, if the wage earner has an access to an employer-based retirement plan, e.g., Roth 401(k), can he also contribute $9,235 to Roth 401(k) as well as maxing out Roth IRA(s)?

dbltrbl
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Joined: Thu Mar 01, 2007 11:52 am

Re: Contribution limits to Roth IRA and 401(k) with small earned income

Post by dbltrbl » Wed May 23, 2018 4:35 am

They can contribute the total amount in BOX 1 of W-2.

billfromct
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Joined: Tue Dec 03, 2013 9:05 am

Re: Contribution limits to Roth IRA and 401(k) with small earned income

Post by billfromct » Wed May 23, 2018 8:20 am

Contributing to a Roth 401k does not decrease your earned income. Contributing to a tax deductible 401k would reduce your earned income.

My daughter did something similar during her first job out of college as an independent contractor (effectively self employed). She opened a Solo 401k & contributed to a Roth account within her Solo 401k.

As this was a short term job (I think 3 or 6 months), she had enough earned income to max out her Roth IRA ($5,500) that year; effectively contributing a much higher amount to Roth retirement accounts that year. If she was a regular employee with limited earned income, i would have encouraged her to contribute to a Roth 401k at her income level as well as a Roth IRA.

Don't forget that if you leave the job & you're 70 or over you need to start RMD's (required minimum distributions) from your Roth 401k unless you roll over the Roth 401k money into your Roth IRA by the end of the year.

As a side note: the company I previously worked for had a maximum 50% contribution limit for the regular 401k & a 25% maximum contribution limit to the "catch-up" 401k contribution (if over age 50) or a maximum contribution of 75% if you contributed to both the regular 401k & the "catch-up" 401k.

bill
Last edited by billfromct on Wed May 23, 2018 11:10 pm, edited 1 time in total.

MathIsMyWayr
Posts: 117
Joined: Mon Mar 27, 2017 10:47 pm
Location: CA

Re: Contribution limits to Roth IRA and 401(k) with small earned income

Post by MathIsMyWayr » Wed May 23, 2018 6:29 pm

My question is about the mechanics of Roth contribution.
  • Since FICA (social security and medicare) is flat taxes, I think FICA is taxed first. Are only the remainder of the total earnings after FICA, not the total earnings, eligible for Roth contributions?
  • May the sum of all Roth contributions (Roth IRA, Roth 401(k), etc) by a married couple exceed the eligible amount above?
    Assume that taxes on the earnings may be paid from other funds.

ExitStageLeft
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Re: Contribution limits to Roth IRA and 401(k) with small earned income

Post by ExitStageLeft » Wed May 23, 2018 6:35 pm

For 2015, 2016, 2017 and 2018, your total contributions to all of your traditional and Roth IRAs cannot be more than:
•$5,500 ($6,500 if you’re age 50 or older), or
•your taxable compensation for the year, if your compensation was less than this dollar limit.

https://www.irs.gov/retirement-plans/pl ... ion-limits


A nonworking spouse can make a deductible IRA contribution of up to $5,500 for 2017 ($6,500 if age 50 or older as of Dec. 31, 2017) as long as the couple files a joint return, and the working spouse has earned income that equals are exceeds the sum of the nonworking spouse’s contribution plus the working spouse’s contribution.

https://www.marketwatch.com/story/how-t ... 2015-02-24

Edit to add: The earned income is what is earned, without regard to FICA or any other taxes taken out. In your example, with income of $10,000 the couple can contribute $10,000 in their IRA accounts, with no more than $6500 for either person.

Spirit Rider
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Re: Contribution limits to Roth IRA and 401(k) with small earned income

Post by Spirit Rider » Wed May 23, 2018 9:08 pm

Maximum total Roth 401k and Roth IRA contributions on $10,000 in W-2 wages or $10,000 in self-employed business profit.
  • $10,000 in W-2 wages:
    • Roth 401k: Employee elective contributions must be deducted from compensation not already received after mandatory deductions (minimum 7.65% employee share of FICA). Maximum of Roth 401k $10,000 - ($10,000 * 7.65% = $765) = $9,235.
    • Roth IRA: Roth 401k contributions do not reduce compensation available for IRA contributions. The combined Roth IRA and Spousal IRA contributions must be <= $10,000.
    • Total contributions: $9,235 + $10,000 = $19,235
  • $10,000 in business profit = $9,294 in net self-employment earnings:
    • Roth 401k: Maximum employee elective contribution = $9,294.
    • Roth IRA: Roth 401k contributions do not reduce compensation available for IRA contributions. The combined Roth IRA and Spousal IRA contributions must be <= $9,294.
    • Total contributions: $9,294 + $9,294 = $18,588.

MathIsMyWayr
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Location: CA

Re: Contribution limits to Roth IRA and 401(k) with small earned income

Post by MathIsMyWayr » Wed May 23, 2018 11:14 pm

Thank you, Spirit Rider,

It looks like a small income after retirement may stretch a long way. During the years of low taxable income , Roth will be an ideal choice. This way, retirees may convert even a portion of RMD to Roth without depleting pre-tax accounts by paying tax and FICA on earned income by RMD if all the RMD is not needed for living expenses. Doubling down with 401(k) is a nice bonus. If one earns a W-2 wage as little as $26,529.51, then the couple can contribute a total of $37,500 to Roth.
  • W-2 wage: $26,529.51
    FICA: $2,029.51
    Roth 401(k): $24,500.00
    2 Roth IRAs: $13,000.00
    -------
    Total Roth: $37,500.00

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Contribution limits to Roth IRA and 401(k) with small earned income

Post by Spirit Rider » Thu May 24, 2018 10:34 am

MathIsMyWayr wrote:
Wed May 23, 2018 11:14 pm
  • W-2 wage: $26,529.51
    FICA: $2,029.51
    Roth 401(k): $24,500.00
    2 Roth IRAs: $13,000.00
    -------
    Total Roth: $37,500.00
Note: The catch-up contribution is not included in the 415c 100% of compensation limitation. So you can make your $18.5K Roth 401k contribution and $6K Roth 401k catch-up contribution and $13K Roth IRA contributions = $37.5K total contributions with W-2 wages ~= $20,032.50.

If this is an S-Corp shareholder-employee with W-2 wages = 24,666.67, you can add up to 6,166.67 in employer contributions, but, the employer contribution must come from the S-Corps profits.

Note: All of the above can also be done with a sole proprietorship. The same business profit is required, the numbers are just calculated differently.

Modest earned income in retirement is tremendously beneficial and I haven't mentioned the Self-Employed Health Insurance deduction for the self-employed and S-Corp shareholder-employees.

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