Contributions to Both Roth 401K and Roth IRA
I just retired last month after working since 1968 and in the military
two years before that. I’m a big believer in Roth IRAs for my wife and
me so instead of terminating my employment I remained in a temporary on
call status. Next year I may not have enough earned income to max out
our Roths at $6000 each so I left enough personal leave in my account so
that I can draw out at least $12000 of earned income next calendar year.
This will cover our individual Roths but I would also like to contribute
to my company’s Roth 401-K to the max which is 50% of earned income up
to a limit around $22,500 or in my case only $6000. The question I have
is can I contribute to both with only $12000 earned income at the level
of $6000 in each Roth IRA and $6000 in the Roth 401-K?
Permalink Submitted by Alan Spross on Tue, 2012-08-07 22:02
Yes.
Assuming that your personal leave funds show in Box 1 of your W-2, you can use that money for Roth IRA contributions including the spousal contribution. If you can also make a Roth 401k contribution from this same income you are allowed double use of the same income. Whether your company allows you to make the Roth 401k contributions in this situation is another question.
In other words, your Box 1 income is 12,000 because you owe tax on the designated Roth deferral. That same income can be used for your Roth IRA contributions.
Permalink Submitted by Harold Justice on Tue, 2012-08-07 22:25
Thanks Alan. My company will not know if I’m going to put money in an IRA but I’ve already been told that the personal leave pay is eligible for the 401K since it is considered earned income. What I’m concerned about is if the IRS would object to funding a total of $18,000 in the 401K and IRA with only $12,000 in earned income.
Permalink Submitted by Alan Spross on Tue, 2012-08-07 23:00
No, the IRS would not object because a W-2 box 1 amount is a safe harbor for an IRA contribution (actually Box 1 less Box 11, but Box 11 will not apply in your case). The IRS does not even consider the W-2 coding that indicates you made designated Roth deferrals from the amount showing in Box 1.
This is counter intuitive, but that is how the rules were written in 2006 when the designated Roth first became available. Therefore, you could do the full 18k.