Individual contribution, deferral limits

[Gary]

This question is an attempt to coordinate limits for an individual who wants to make 401k roth and roth ira contributions for 2009.

Say a 1 employee/participant/owner corporation provides compensation of $24,000 for its one employee/owner.

The employee is over age 50.

Say individual makes a designated Roth 401k contribution of $22,000 for 2009. $16,500 plus $5,500 catch up.

Issue #1

Regarding employer deduction limits and annual addition limits the catch up contribution of $5,500 is not counted. Do we agree?

Therefore, a 25% employer contribution of $6,000 is acceptable since the annual addition would be $22,500 ($16,500 plus $6,000) which is less than the 100% compensation limit of $24,000.

Now say the employee is below the AGI limits for a Roth IRA contribution.

Regarding the 100% of compensation IRA contribution limit; is it equal to $24,000 since the 401k contributions were all Roth contributions?

If the 401k contributions were made on a pre-tax basis would the 100% limit be $2,000 ($24,000 less $22,000)?

Thank you.

[Bird]

Yes, I believe you are correct on all counts.

[Peter Gulia]

Gary, if your hypothetical participant is an employee of a corporation, you'd also check whether the modest compensation would be enough to support withholding for Federal, State, and local income taxes and the employee's portion of FICA taxes.

For example, if one assumes withholding at about 15% for Federal income tax and 7.65% for FICA taxes (and assumes no withholding for any State or local income tax), a salary of about $28,443 might be needed to pay the $22,000 Roth elective contribution, withhold $6,442.34 toward taxes, and leave 66 cents for a net paycheck.

For another example, if our hypothetical employee lives in best city in the world, she would need a salary of about $36,455 to pay the $22,000 Roth elective contribution, withhold $14,454.41 toward taxes [25% FIT, 7.65% FICA, 3.07% PA, 3.93% Phila.], and leave 59 cents for a net paycheck.