IRA contributions

[Gary]

Say we have a married couple named Jack and Diane

Jack earned W-2 compensaiton in 2009 of $22,000 and is age 60.

Diane had no W-2 compensation and is age 45.

Jack participated in a 401k plan in 2009.

They file a joint tax return and have AGI below all applicable limits.

Jack made a 401k Roth contribution of 22k (16,500 + 5,500) in 2009.

Do we agree that Form W-2, box 1 for Jack would show $22,000 since all contributions are Roth and taxable?

Is it true then that he would be able to make a $6,000 Roth IRA contribution for 2009?

And is it true that he could make a $5,000 spousal Roth IRA contribution for 2009?

This means with W-2 compensation of $22,000 Jack would make retirement plan contributions of $33,000 in total.

Is the above accurate?

Thanks.

[GMK]

Somewhere it must come in that Roth contributions are limited to the lesser of taxable income or the dollar limit.

[Guest Sieve]

You must have earned income (from working) to be able to make an IRA contribution. If the salary deferrals take them down to $0, there is no room for IRAs. (Of course, we know that Jack & Diane are doin' the best that they can . . .)

[Gary]

I understand the comment about earned income and salary deferrals reducing earned income, but in this case the deferrals are Roth 401k contributions and they don't reduce the income on W-2, box 1 and I have seen where compensation for IRA contribution purposes is tied to W-2 box 1?

Thanks

[Guest Sieve]

A Roth is treated as a deductible IRA, except where IRC Section 408A treats it differently (IRC Section 408A(a)). The contribution limit for a Roth starts from "the maximum amount allowable as a deduction under Section 219 with respect to such individual" (IRC Section 408A©(2), emphasis added), and an amount is not deductible as an IRA contribution if it exceeds the individual's compensation includible in gross income (IRC Sections 219(b)(1) & ©(1)). (Look at Pub. 590, p. 58: http://www.irs.gov/pub/irs-pdf/p590.pdf)

So, if deferrals into a 401(k) reduce your compensation to $0, there's no IRA potential.

[GMK]

Think of your various Roth accounts as one Roth account, and your Roth contributions as contributions to that account.

The most you can contribute to your Roth accounts (be they IRA or 401k) is 100% of your earned income (thanks, Seive, for the more precise statement and the cites), regardless of the maximum limits.

[Gary]

What you say makes sense.

However, my point is that in this particiular situation where the person has 22k of compensation and makes a Roth 401k of 22k box 1 of W-2 FOrm is $22,000.

On page 8 of the Publication 590 it says in the section "What is Compensation" that the IRS treats as compensation any amount properly shown in box 1 of FOrm W-2 where compensation is used to determine the maximum IRA contribution.

So in my example it would follow that since the person has W-2 box of $22,000 why couldn't he make an IRA contribution?

I imagine that the prior answer provided (that being that the IRA limit would be $0 in this case) is correct, but if W-2 taxable compensation in box 1 is the deciding factor as it seems to indicate in the publication than following that statement would allow for an IRA contribution be it Roth or traditional.

Thanks.

[Guest Sieve]

I'd not read carefully enough earlier, and did not realize the 401(k) contribution was a Roth (which is why I said that the deferrals took compensatin down to $0). Now I see where you're coming from and, although the concept does not sit right with me and is contrary to what I believed the rule was, I do not know what would prohibit it.

And, if you're right, it produces the anamoly (at least to me) that someone with $1,000 of income could, if eligible, defer $1,000 into a Roth 401(k) and also contribute $1,000 into a Roth IRA--but, could not make a Roth IRA contribution if the $1,000 into the 401(k) was a non-Roth deferral (thus reducing income to $0).

Anyone else aahve any other thoughts?. Where have Gary & I gone wrong?

[GMK]

Aren't all your Roth accounts, whether in 401(k)'s or IRA's, considered to be your one big Roth?

Regardless of much you contribute to your various, individual Roth accounts, the overall total you contribute to your Roths for a given year cannot exceed your earned income for the year.

Or did I miss something special about a 401(k) Roth?

[Borsley]

Aren't all your Roth accounts, whether in 401(k)'s or IRA's, considered to be your one big Roth?

Regardless of much you contribute to your various, individual Roth accounts, the overall total you contribute to your Roths for a given year cannot exceed your earned income for the year.

Or did I miss something special about a 401(k) Roth?

Simple answer - "no". Roth(k), if I'm not mistaken, doesn't have income restrictions, same max annual contribution limitation, and there is also a difference in when the 5 year window opens/closes for each (i.e...they each stand on their own per individual if said individual has opened both types). Isn't there also a small difference in alllowable distributions and when they receive tax-free treatment?

[GMK]

Thanks for the insights, Borsley. I haven't looked into Roth(k)'s at all, and this is very interesting information.

Are you saying, then, that Roth IRA's and 401(k) Roths are 2 completely separate animals? That is, is it true that what you do with your 401(k) Roth does not affect or limit what you do with your Roth IRA, and vice versa?

If not, where do they overlap (or would you please suggest a few good references for reading about where they do and do not overlap)? Thanks again.

[GMK]

OK. I'm an idiot. Yes, according to the IRS, you can max out both your Roth 401(k) and your Roth IRA.

http://www.irs.gov/retirement/article/0,,id=152956,00.html#7

Can an individual make the maximum contributions, including catch-up contributions, to both a designated Roth 401(k) or 403(b) account and a Roth IRA in the same year?

Yes. An individual age 50 or older can make a contribution of up to $22,000 in 2009 to the 401(k) or 403(b) plan ($16,500 regular and $5,500 catch-up contributions) and $6,000 to a Roth IRA ($5,000 regular and $1,000 catch-up IRA contributions) for a total of $28,000 for 2009.

Edit: ... but would you need to have $28,000 of earned income to do it?

[Guest Sieve]

Apparently not.

[GMK]

It doesn't feel right to me, but I think Gary is correct.

I can't find anything against it, and the degreed and certified friends I asked (who all thought it is a great question) think that $22k is enough earned income.

Good call, Gary