Roth IRA’s odd contribution question

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eddot98
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Location: The Berkshires

Roth IRA’s odd contribution question

Post by eddot98 » Wed Oct 09, 2019 6:11 pm

I am 68 years old, semi-retired with a odd question on Roth IRA contributions. We are comfortably under the Roth IRA income limit for a full deduction of $7000 for both me and DW. My part time job will pay me $28,800 this year. Due to some one time income this year we needed to shelter $18,900 in my 401k plan due to Medicare MAGI and IRMAA. We want to contribute as much as possible of the remaining $9900 to my and DW’s Roth IRA’s. Can we each contribute half of that amount, $4950, to each of our existing Roth IRA’s or since I will be paying almost $2900 to SS, Medicare, and Federal and state withholding does that limit our Roth contributions? Obviously, the Roth contributions will come from savings.
I have researched this question, with no helpful results to date.

Silk McCue
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Re: Roth IRA’s odd contribution question

Post by Silk McCue » Wed Oct 09, 2019 6:22 pm

It is your gross earned income of $28k that supports the contribution to the Roth IRA not that those dollars actually are used or taxed on your return. You can absolutely contribute to Roth from your savings to the full $7k each if you wish.

Cheers

Topic Author
eddot98
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Location: The Berkshires

Re: Roth IRA’s odd contribution question

Post by eddot98 » Wed Oct 09, 2019 6:34 pm

Silk McCue wrote:
Wed Oct 09, 2019 6:22 pm
It is your gross earned income of $28k that supports the contribution to the Roth IRA not that those dollars actually are used. You can absolutely contribute to Roth from your savings to the full $7k each if you wish.

Cheers
Thanks, but I’m confused. Even if I contributed $18,900 of my $28,800 of gross income to my 401k we can still contribute $7000 each to our Roth IRA’s? If so, that’s great.

Silk McCue
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Re: Roth IRA’s odd contribution question

Post by Silk McCue » Wed Oct 09, 2019 6:52 pm

eddot98 wrote:
Wed Oct 09, 2019 6:34 pm
Thanks, but I’m confused. Even if I contributed $18,900 of my $28,800 of gross income to my 401k we can still contribute $7000 each to our Roth IRA’s? If so, that’s great.
It looks like I got that wrong. My apologies. Please see lakpr’s post below in this thread.

viewtopic.php?f=1&t=292228#p4786426

Cheers
Last edited by Silk McCue on Wed Oct 09, 2019 8:18 pm, edited 1 time in total.

ralph124cf
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Re: Roth IRA’s odd contribution question

Post by ralph124cf » Wed Oct 09, 2019 7:17 pm

Silk McCue wrote:
Wed Oct 09, 2019 6:22 pm
It is your gross earned income of $28k that supports the contribution to the Roth IRA not that those dollars actually are used or taxed on your return. You can absolutely contribute to Roth from your savings to the full $7k each if you wish.

Cheers
I believe that this is incorrect. There is a basic combined limit of $19K for contributions to 401(k) and an IRA, including ROTH IRA.

There is a "catch up" allowance of another $6K if you are over 50. Therefore you can contribute a total of $6,100 to a Roth IRA.

In addition, you may contribute $7K for your wife to an IRA or a ROTH.

Ralph

lakpr
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Re: Roth IRA’s odd contribution question

Post by lakpr » Wed Oct 09, 2019 7:35 pm

ralph124cf wrote:
Wed Oct 09, 2019 7:17 pm
Silk McCue wrote:
Wed Oct 09, 2019 6:22 pm
It is your gross earned income of $28k that supports the contribution to the Roth IRA not that those dollars actually are used or taxed on your return. You can absolutely contribute to Roth from your savings to the full $7k each if you wish.

Cheers
I believe that this is incorrect. There is a basic combined limit of $19K for contributions to 401(k) and an IRA, including ROTH IRA.

There is a "catch up" allowance of another $6K if you are over 50. Therefore you can contribute a total of $6,100 to a Roth IRA.

In addition, you may contribute $7K for your wife to an IRA or a ROTH.

Ralph
Sorry, but this is completely false. Silk McCue is correct. You can make up to $19k contribution to a traditional 401k or Roth 401k. If you make a Roth 401k contribution, your Box 1 figure on the year end W2 form will not reduce. If you make a traditional 401k contribution, it will be reduced by the amount of contribution.

Next, as long as the Box 1 amount is more than $6000 or $7000 for folks over age 50, you can make the full Roth IRA contribution. The important point to keep in mind here is that because you are participating in an employer plan, your ability to contribute to a traditional IRA is limited, therefore for the IRAs the only option is Roth.

This can lead to a situation for someone earning say only $12000 per year, to effectively contribute $18k combined into 401k and IRA. Roth 401k contribution is 100% of salary = $12k. It does not reduce income so Box 1 will show $12k still. If the person has additional funds he can scrounge up, he can contribute $6k to Roth IRA. Cumulative total = $18k

HomeStretch
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Re: Roth IRA’s odd contribution question

Post by HomeStretch » Wed Oct 09, 2019 7:37 pm

There is not a combined limit of $19k (before catch-up contributions) for 401k and IRAs contributions. The limit for each is separate ($19k and $6k, respectively, before catch-up contributions of $6k and $1k, respectively). In your case, as your earned income is under $39k, you/spouse will not be able to contribute up to those limits if you make a pretax 401k and Roth IRA contributions.

In the scenario you gave, I believe you could contribute to your/spouse’s Roth IRA up to the amount of earned income reported on your Form W-2 Box 1. In your case, the amount reported would be $9,900 (= $28,800 wages - $18,900 pretax 401k deferrals).

Does your 401k plan allow Roth contributions?

Longdog
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Re: Roth IRA’s odd contribution question

Post by Longdog » Wed Oct 09, 2019 7:47 pm

lakpr wrote:
Wed Oct 09, 2019 7:35 pm
ralph124cf wrote:
Wed Oct 09, 2019 7:17 pm
Silk McCue wrote:
Wed Oct 09, 2019 6:22 pm
It is your gross earned income of $28k that supports the contribution to the Roth IRA not that those dollars actually are used or taxed on your return. You can absolutely contribute to Roth from your savings to the full $7k each if you wish.

Cheers
I believe that this is incorrect. There is a basic combined limit of $19K for contributions to 401(k) and an IRA, including ROTH IRA.

There is a "catch up" allowance of another $6K if you are over 50. Therefore you can contribute a total of $6,100 to a Roth IRA.

In addition, you may contribute $7K for your wife to an IRA or a ROTH.

Ralph
This can lead to a situation for someone earning say only $12000 per year, to effectively contribute $18k combined into 401k and IRA. Roth 401k contribution is 100% of salary = $12k. It does not reduce income so Box 1 will show $12k still. If the person has additional funds he can scrounge up, he can contribute $6k to Roth IRA. Cumulative total = $18k
I don’t believe you can ever contribute 100% of your salary. At a minimum, even if the plan has no restrictions, there will be FICA withheld, making it unavailable for contribution to a Roth 401k.
Steve

lakpr
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Re: Roth IRA’s odd contribution question

Post by lakpr » Wed Oct 09, 2019 8:31 pm

True, but that is more of a practical implementation constraint. HR has to withhold FICA before sending the rest of the money to 401k plan, and for this reason most plans limit contributions to 90% of the salary. My example also is intended to illustrate the concept of your Retirement plan contributions exceeding your actual salary, not whether the details are correct to a tee.

Spirit Rider
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Re: Roth IRA’s odd contribution question

Post by Spirit Rider » Wed Oct 09, 2019 8:59 pm

Longdog wrote:
Wed Oct 09, 2019 7:47 pm
I don’t believe you can ever contribute 100% of your salary. At a minimum, even if the plan has no restrictions, there will be FICA withheld, making it unavailable for contribution to a Roth 401k.
While that is true the OP stated that they will have $28,800 in wages..

MarkNYC
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Re: Roth IRA’s odd contribution question

Post by MarkNYC » Wed Oct 09, 2019 9:34 pm

lakpr wrote:
Wed Oct 09, 2019 7:35 pm

Next, as long as the Box 1 amount is more than $6000 or $7000 for folks over age 50, you can make the full Roth IRA contribution. The important point to keep in mind here is that because you are participating in an employer plan, your ability to contribute to a traditional IRA is limited, therefore for the IRAs the only option is Roth.
This is not correct. Being an active participant in an employer retirement plan never limits your ability to contribute to a traditional IRA. It does have the potential to limit the deductibility of the IRA contribution, but that only happens when modified AGI exceeds a certain limit, which is based on filing status.

lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Roth IRA’s odd contribution question

Post by lakpr » Wed Oct 09, 2019 9:57 pm

MarkNYC wrote:
Wed Oct 09, 2019 9:34 pm
This is not correct. Being an active participant in an employer retirement plan never limits your ability to contribute to a traditional IRA. It does have the potential to limit the deductibility of the IRA contribution, but that only happens when modified AGI exceeds a certain limit, which is based on filing status.
Conceded. I did mean deductibility of the contributions, which, most often, makes the only "practical" option to be Roth IRA. Not the actual contributions themselves.

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

Re: Roth IRA’s odd contribution question

Post by Spirit Rider » Wed Oct 09, 2019 11:08 pm

eddot98 wrote:
Wed Oct 09, 2019 6:11 pm
I am 68 years old, semi-retired with a odd question on Roth IRA contributions. We are comfortably under the Roth IRA income limit for a full deduction of $7000 for both me and DW. My part time job will pay me $28,800 this year. Due to some one time income this year we needed to shelter $18,900 in my 401k plan due to Medicare MAGI and IRMAA. We want to contribute as much as possible of the remaining $9900 to my and DW’s Roth IRA’s. Can we each contribute half of that amount, $4950, to each of our existing Roth IRA’s or since I will be paying almost $2900 to SS, Medicare, and Federal and state withholding does that limit our Roth contributions? Obviously, the Roth contributions will come from savings.
I have researched this question, with no helpful results to date.
IRA contributions require compensation. For W-2 employees, this is your W-2 Box 1 net wages. If you have $28,800 in W-2 gross wages and make an employee deferral of $18,900. Your W-2 Box 1 will be $28,800 - $18,900 = $9,900. You can share that amount between you and your wife for IRA contributions.

However, there are some other possibilities. First some questions:
  • Does your 401k plan allow Roth 401k contributions?
  • Assuming that your plan does not have a contribution percentage limit
  • Will your IRA and Roth MAGIs be less < $193K?
This will allow the following with maximum flexibility:
  • If all of the above are true, you can make $39K in retirement plan contributions.
  • You can make (your W-2 gross wages - $14K) in pre-tax employee deferrals, $19K - those pre-tax deferrals in designated Roth 401k contributions and $6K in designated Roth 401k catch-up contributions for a total of $25K in 401k contributions.
  • You can make $7K in Roth IRA contributions.
  • Your non-active participant wife can make $0 - $7K in traditional IRA contributions and $7K - the tIRA contributions in Roth IRA contributions.
  • This allows you to reduce your taxable income by (your W-2 gross wages - $14K pre-tax deferrals) to that amount + $7K in traditional IRA deductions. With your projected gross wages of $28,800, that is $14,800 -> $21,800 adjustments to income.
  • The beauty of the traditional IRA contributions is that you can fine tune your IRMAA MAGI when doing your tax return.

Topic Author
eddot98
Posts: 272
Joined: Wed Jan 01, 2014 11:47 am
Location: The Berkshires

Re: Roth IRA’s odd contribution question

Post by eddot98 » Thu Oct 10, 2019 3:01 pm

Spirit Rider wrote:
Wed Oct 09, 2019 11:08 pm
eddot98 wrote:
Wed Oct 09, 2019 6:11 pm
I am 68 years old, semi-retired with a odd question on Roth IRA contributions. We are comfortably under the Roth IRA income limit for a full deduction of $7000 for both me and DW. My part time job will pay me $28,800 this year. Due to some one time income this year we needed to shelter $18,900 in my 401k plan due to Medicare MAGI and IRMAA. We want to contribute as much as possible of the remaining $9900 to my and DW’s Roth IRA’s. Can we each contribute half of that amount, $4950, to each of our existing Roth IRA’s or since I will be paying almost $2900 to SS, Medicare, and Federal and state withholding does that limit our Roth contributions? Obviously, the Roth contributions will come from savings.
I have researched this question, with no helpful results to date.
IRA contributions require compensation. For W-2 employees, this is your W-2 Box 1 net wages. If you have $28,800 in W-2 gross wages and make an employee deferral of $18,900. Your W-2 Box 1 will be $28,800 - $18,900 = $9,900. You can share that amount between you and your wife for IRA contributions.

However, there are some other possibilities. First some questions:
  • Does your 401k plan allow Roth 401k contributions?
  • Assuming that your plan does not have a contribution percentage limit
  • Will your IRA and Roth MAGIs be less < $193K?
This will allow the following with maximum flexibility:
  • If all of the above are true, you can make $39K in retirement plan contributions.
  • You can make (your W-2 gross wages - $14K) in pre-tax employee deferrals, $19K - those pre-tax deferrals in designated Roth 401k contributions and $6K in designated Roth 401k catch-up contributions for a total of $25K in 401k contributions.
  • You can make $7K in Roth IRA contributions.
  • Your non-active participant wife can make $0 - $7K in traditional IRA contributions and $7K - the tIRA contributions in Roth IRA contributions.
  • This allows you to reduce your taxable income by (your W-2 gross wages - $14K pre-tax deferrals) to that amount + $7K in traditional IRA deductions. With your projected gross wages of $28,800, that is $14,800 -> $21,800 adjustments to income.
  • The beauty of the traditional IRA contributions is that you can fine tune your IRMAA MAGI when doing your tax return.
Thanks for all the responses. Regarding this particular one: no, there isn’t a Roth 401k option, which leaves me only one option. Since my W2 Box 1 will have $9900 in it, we will be limited to that amount for our total Roth IRA contribution. How we will split that between DW and me is yet to be determined- probably half each.

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