Can my kid contribute to a Roth IRA?

Submitted by John Smith on Mon, 2021-01-04 17:10

Hello-

My son is a W2 employee working a low paying job, earning about $10,000 per year. He lives at home and I provide 100% of his support, so he doesn’t currently need the income from his job.

He’s contributing close to 100% of his income to his company’s 401K, so his bi-weekly paychecks are only tens of dollars of take-home pay. His total paychecks for 2020 after his 401K contributions, for example, was maybe a few hundred bucks.

Is he allowed to make an additional, full contribution of $6000 to a Roth IRA for 2020 even though he has pretty much used his entire $10,000 of annual pay to fund his 401K? He would make this $6000 contribution from his savings account which has a large balance, or I might give him the $6000 to make the contribution.

Thanks for your time.



Submitted by David Mertz on Mon, 2021-01-04 17:41

His maximum IRA contribution is limited to the amount shown in box 1 of his W-2.  If his 401(k) contributions were elective deferrals to the traditional account in the 401(k), his maximum IRA contribution will be limited to less than $6,000 since these elective deferrals reduce the amount that would otherwise be in box 1 of the W-2.

Submitted by William Tuttle on Mon, 2021-01-04 18:03

If your son is making Roth 401k employee deferrals, those are post-tax and will not reduce Form W-2 Box 1.
Since your son is not paying any income taxes, he should not be making any traditional 401k employee deferrals. He derives no tax deferral now and retirement distributions will be taxable.
He should only be making Roth 401k employee deferrals. He pays no income taxes on his wages now and retirement distributions will be tax free.
The above is assuming the employer’s 401k plan supports Roth 401k employee deferrals. Not all do.

Submitted by David Mertz on Mon, 2021-01-04 19:05

If the employer does not allow Roth contributions to the 401(k), it still might be beneficial to make elective deferrals to the 401(k) to the extent that they do not reduce the amount that he can contribute to a Roth IRA.  It’s likely that those can be later rolled over to a Roth IRA (and included in income) once he leaves that employer, resulting in greater Roth IRA savings growing tax free (once the requirements for qualified distributions have been met) than would be possible without having made the elective deferrals.

Submitted by William Tuttle on Mon, 2021-01-04 20:25

I agree

Submitted by John Smith on Mon, 2021-01-04 20:33

Thanks for all the comments.  I should have been more clear in that his employer does provide for a Roth 401K and this is the type of contribution that he is making.  I appreciate everyone’s time.

Submitted by Alan - IRA critic on Mon, 2021-01-04 20:39

Then he should have Box 1 W-2 income sufficient to also make a Roth IRA contribution. While counter-intuitive, he can actually use the same dollars of earned income for both the Roth 401k and Roth IRA contributions.

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