Income limits for IRA

Submitted by alberto vega on Wed, 2018-11-21 00:38

Husband (age 62) Wife (age 48) have the following income for 2018 : W = from S corp $600,00 business income, and $ 120,000 wages . Also from investments $ 100,000 interest income. W has a SIMPLE IRA she contributes the max $12,500; S corp contributes about $4000
H =$12,000 W2 wages; $300,000 principally interest and some dividend income
They have one child age 10 has about $2,000 in interest income.
Tried to get W to set up a 401k plan for higher deductions than Simple IRA but because of 8 additional employees in the business, W
does not want to make contributions on their behalf to 401K. Even though I ran an scenario which shows 78% of the contributions would go to W and 22% to all employees. And of course the contributions would reduce the business income
by about $100,000 still a no go.

Questions”
1. H and W do not qualify for Roth IRA?
2. Can W open a non-deductible regular IRA and contribute max in 2018 which is $5,500. She has a Simple IRA from the business?
3. Can H open a non-deductible regular IRA and contribute max in 2018 which is $ 5,500 +$1,000 for over age 50?
4. Can the child be given a $5,500 salary from the wife’s S corp and set up a deductible IRA for $5500 for child since he will file also a separate tax return because of his W2 wages ( and interest income). Thus his taxable income will be only the interest income of $2,000.
Or the child is also required to have a non-deductible regular IRA because of his parents’ high income



Submitted by alberto vega on Wed, 2018-11-21 01:04

The plan that was suggested was not a 401k but a  qualified defined benefit plan.  Even though the suggestion also included  a 401k and a defined benefit plan. With  the likelihood if implemented the Simple IRA had to be cancelled

Submitted by William Tuttle on Wed, 2018-11-21 02:47

  1. H and W do not qualifiy for direct Roth IRA contributions.
  2. W can open a traditional IRA and make non-deductible contributions, but any Roth conversion would be prorated with the SIMPLE IRA balance. It makes no sense to make non-deductible contributions that can not be converted. All earnings would be taxable at the highest marginal tax rates.
  3. If H has no pre-tax balances in all traditional, SEP and SIMPLE IRA accounts he can do a non-deductible contribution to a traditional IRA followed immediately by a Roth conversion with little to no tax liability. This is the so-called Backdoor Roth.
  4. A child can not just be given wages, they must be earned. They must receive a Fair Market Value (FMV) wage based on the actual number of hours worked productively completing the tasks assigned. Then there are Child Labor laws. Under federal law children under 14 can work for their parent, but some states still restrict the minimum age even for parents to 14 or maybe 12 with limted work hours and number of hours/week. Even if legal you would be hard pressed to justify a 10 year old earning $5500/year. You would never want a child to make deductible IRA contributions as they now have a $12,000 standard deduction. They should make Roth IRA contributions. Their parent’s income has no effect on this.
  • For 2019 a safe habor 401k would allow W to make $19K in employee elective contributions vs. $13K in SIMPLE IRA employee elective deferrals. A safe harbor 401k only requires a 4% employer match (100% of the first 3% of compensation and 50% of the next 2% of compensation). This is only 1% more than a SIMPLE IRA and some employees will not contributed enough to get the full match. Most importantly this would allow W to rollover her SIMPLE IRA balance (assuming two years since first contribution) to the 401k allowing a Backdoor Roth with little to no tax liability.
  • Unfortunately, a SIMPLE IRA plan can be the only plan for a calendar year. The employer would have had already given the 60-day required SIMPLE IRA notice on 11/2 for the 2019 plan year.

Submitted by alberto vega on Wed, 2018-11-21 15:36

Therefore in 2010 the S corp can set up a 401k and also keep the Simple IRA?

Submitted by Alan - IRA critic on Wed, 2018-11-21 15:59

I think you meant 2020.  For 2019, the SIMPLE IRA must be continued since the notification period for 2019 ended 11/2. With enough lead time, the plan can be changed to a 401k for 2020. Employer may not have another plan as long as the SIMPLE IRA is active.

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