Impact of individual 401k contributions on IRA contributions

Submitted by Rick Pyper on Thu, 2022-12-15 15:20

IRS Pub 560 says contributions to a SEP or a SIMPLE IRA “won’t affect the amount an individual can contribute to a Roth or traditional IRA.” Is that also true for sole-proprietor or W-2 employee contributions to an individual traditional 401k? (Pub 560 is silent on that issue).



Submitted by David Mertz on Thu, 2022-12-15 16:04

  • It’s true that the overall annual IRA contribution limit is separate from the limits for contributing to an employer plan.  However, regular IRA contributions are limited to available compensation and elective deferrals to a SIMPLE IRA or to the traditional account in a 401(k) reduce available compensation, as do employer contributions made by a sole proprietor.  As long as sufficient compensation remains, the IRA contribution is limited only by the overall annual contribution limit.
  • For example, a sole proprietor who has profit of less than $20,000 who makes the maximum permissible elective deferral to the traditional account in a 401(k) will have no compensation left to contribute to an IRA.  However, if that same sole proprietor has $100,000 of profit, after making maximal elective deferral and employer contributions there will still be sufficient compensation left over to contribute the full annual limit to an IRA.

Submitted by Alan - IRA critic on Thu, 2022-12-15 16:11

The same is true for a qualified plan contribution. While such contributions do not directly affect TIRA or Roth IRA contributions, there may be indirect implications. For example, these contributions to employer plans will trigger a MAGI limit for the deduction of any TIRA contribution. Pre tax contributions also reduce MAGI for Roth contribution purposes which may help a higher income taxpayer to qualify for a Roth contribution.

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