Roth 401K and IRA
Suppose you earn 15K and put it all in a Roth 401K.
Can you still contribute to an IRA. The W2 will
presumably show the 15K earnings in box 1 and
also show the 15K Roth 401K contributions somewhere.
In some sense you are doubled-dipping into the same
earnings pool which would not be allowed if you were
contributing to a normal 401K plan since your taxable
wages would then be 0 and you could not then contribute
to an IRA. Is there some wording somewhere that says
you must deduct the Roth 401K contributions from box 1
of the W2 to determine how much you can put in an IRA,
is this a loophole, or was it intended to be allowed?
Permalink Submitted by Alan Spross on Sun, 2008-02-24 05:44
It does seem strange, but if it’s in Box 1 less Box 11(and a designated Roth contribution as well as an after tax regular 401k contribution are included in Box 1), it’s eligible for an IRA contribution. After all it is compensation and it is taxable.
This was likely intended, since the issue has been around long before the designated Roth contribution. Obviously, very few people would be in a position to be able to make a 100% salary contribution due to either plan constraints or more likely personal cash flow needs, but in those specialized cases like you posted, this is an opportunity to actually contribute more to retirement accounts than you typically could.
Permalink Submitted by Alvin Young on Sun, 2008-02-24 07:44
[quote=”[email protected]“]It does seem strange, but if it’s in Box 1 less Box 11(and a designated Roth contribution as well as an after tax regular 401k contribution are included in Box 1), it’s eligible for an IRA contribution. After all it is compensation and it is taxable.
.[/quote]
Alan, Thanks for the reply. I’m a bit confused by your answer so please
clarify for me….confusion about your reference to box 11, designated Roth
contribution, and after tax regular 401K contribution.
If you have a “regular” plain old (pretax) 401K, I think you would see on
the W2, box 1=0 because all of the wages were put in the 401K . You
would also see in box 12, a code letter showing that 15K was put in the
qualified 401K plan. Since box 1 was 0, you could not contribute to
any IRAs?
If you have a Roth 401K, then the W2 box 1=15K. Some other box would presumably show the 15K Roth 401K contribution—-box 11?
I’m confused because box 11 is labeled nonqualified plan. Is a Roth
401K a nonqualified plan? Anyway, since box 1 of the W2 shows
15K, the person presumably could do an IRA contribution outside
of the company on his own.
By “after tax regular 401K contribution”, do you mean Roth 401K?
(got confused by the “regular”).
Designated Roth contribution—what did you mean by this?
Roth 401K?
Permalink Submitted by Alan Spross on Sun, 2008-02-24 22:45
Designated Roth contribution = Roth 401k, Roth 403b etc
After tax regular 401k contribution = a contribution made to a 401k that
is after tax, not pre tax. These have been available all along, and they
also appear in Box 1 of the W-2 because they are taxable. So your
question applies even before the Roth 401k was available.
Box 11 non qualified comp – this amount on a W-2 has always been subtracted from Box 1 because it is the part of NQ comp in Box 1 earned in a prior year. See Pub 590, p 8, which indicates the BOx 11 exclusion as well as continuing to define taxable compensation for purposes of making an IRA contribution to equal Box 1 less Box 11. So I agree in your original hypothetical situation that you CAN make the Roth IRA contribution because you have the Box 1 amount needed.
Permalink Submitted by Alvin Young on Mon, 2008-02-25 16:08
Alan, thanks again for the clarification. One last pt of confusion
After tax regular 401K contribution: after tax contribution to 401K…..
seems similar to Roth 401K but seems like it should be somewhat
different
after tax regular 401K contribution: shows up in box 1 of W2. also
shows up in box 11 (non qualified contributions). Therefore if
box 1=15K and box 11 = 15K, difference between box 1 and
box 11 is 0 so no IRA contribution is allowed.
Roth 401K: this is also after tax contribution so shows up in box 1 of
W2 . But maybe shows up in box 12 ? because it is a qualified
plan contribution?? so box 1= 15K and box 11=0,so difference
between box 1 and box 11 is 15K which allows for IRA contribution
is that correct?
[quote=”[email protected]“]Designated Roth contribution = Roth 401k, Roth 403b etc
After tax regular 401k contribution = a contribution made to a 401k that
is after tax, not pre tax. These have been available all along, and they
also appear in Box 1 of the W-2 because they are taxable. So your
question applies even before the Roth 401k was available.
Box 11 non qualified comp – this amount on a W-2 has always been subtracted from Box 1 because it is the part of NQ comp in Box 1 earned in a prior year. See Pub 590, p 8, which indicates the BOx 11 exclusion as well as continuing to define taxable compensation for purposes of making an IRA contribution to equal Box 1 less Box 11. So I agree in your original hypothetical situation that you CAN make the Roth IRA contribution because you have the Box 1 amount needed.[/quote]
Permalink Submitted by Alan Spross on Mon, 2008-02-25 20:11
No, not correct.
After tax regular 401k contributions do NOT show up in Box 11, that is for deferred Comp earned in prior years. It does show in Box 1 though, meaning it can be used to fund an IRA contribution.
For the Roth 401k, this also would not show in Box 11, but there is a special code in Box 12 to identify it in case excess deferrals are made. As you indicated, this also can therefore be used to fund an IRA contribution because it DOES show in Box 1.
Permalink Submitted by Alvin Young on Mon, 2008-02-25 23:52
Alan, Thanks much for your patience and your tutorial. Not sure I got it
all but certainly more than when I started.
Permalink Submitted by Alan Sheldon on Sat, 2014-02-01 11:55
It sounds like Box 1 of W-2 is what matters to the IRS. For example, if someone earned $18,000 with $10,000 in Box 1 and $8,000 was not taxable as a 403(b) contribution and showing in box 12 of the W-2, then their “Compensation for Purposes of an IRA” (from Pub. 590) would be $10,000?
Permalink Submitted by Alan - IRA critic on Sat, 2014-02-01 18:02
Correct. But if the 403b contributions were Roth 403b contributions, then the Box 1 and IRA taxable comp would be 18,000.