Contribution to 401k and IRA
If an individual has let’s say $20,500 in gross wages, which they choose to defer to a 401k plan, they no longer have earned income for IRA contribution purposes, correct? Per Publication 590A, compensation for IRA contribution purposes does NOT include any amounts you exclude from income. So if wages are fully deferred to a 401k, there are no taxable wages left, and no IRA contribution can be made.
What if the individual instead defers all their wages to a designated Roth 401k? Since that income is still included as taxable income (and included in box 1 of Form W-2), do they have earned income to contribute to an IRA now?
Permalink Submitted by David Mertz on Fri, 2022-11-18 16:49
Correct. Elective deferrals to the traditional account in a 401(k) reduce the compensation available to contribute to an IRA. However, employee contributions to the designated Roth account do *not* reduce the compensation available to contribute to a traditional IRA. The amount of compensation available to support a contribution to an IRA (either traditional or Roth) is the amount shown in box 1 of the individual’s W-2 as explained in IRS Pub 590-A..
Permalink Submitted by Alan - IRA critic on Fri, 2022-11-18 16:52
Yes, Roth 401k contributions do not reduce Box 1 W-2 income, allowing that Box 1 income to be applied to IRA contributions. Pre tax contributions to a 401k are not included in Box 1, but even if contributing pre tax there would be some income reserved for SS/Medicare deductions shown in Box 1, but it would be very little with only 20k of gross income.
Permalink Submitted by learner on Sun, 2022-11-20 02:38
Curious whether the total amount in Box 1, even a small amount, may be applied to Roth 401K, (Roth) IRA, and the spousal (Roth) IRA. For example, may $7,000 in Box 1 be used for contributing $7,000 each to Roth 401K, (Roth) IRA, and the spousal (Roth) IRA?
Permalink Submitted by Alan - IRA critic on Sun, 2022-11-20 03:01
It would support a Roth IRA and Roth 401k contribution for the participant, but the same income used to support a Roth IRA contribution for the Roth owner cannot also support a spousal IRA contribution of any type. Box 1 would have to be 14k in order to make a 7000 Roth IRA and any spousal contribution of the same amount.