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Level 4

Can you exceed your total income over multiple retirement account contributions?

Say your 2019 income is $20,000. If you max your 401k contribution at $19,000, are you limited to putting only $1,000 in a traditional or Roth IRA, or can you still contribute the max $6,000?

 

Or in another example: Say you have a Roth IRA and a SEP IRA, and your 2019 compensation is only $5,000. You put the $5,000 in your Roth IRA. Can you now put $0 in the SEP IRA, or can you still put $1,250 (25% of compensation) in the SEP IRA?

 

Thank you!

1 Reply
Level 20

Can you exceed your total income over multiple retirement account contributions?

Assuming no other sources of compensation and the 401(k) plan is with an employer who provides you with a W-2, your IRA contribution will be limited by the amount reported in box 1 of your W-2.  If you earn $20,000 and make traditional 401(k) elective deferrals of $19,000, only $1,000 would be present in box 1 of your W-2.  However, if you can make a sufficient amount of Roth 401(k) contributions instead of traditional 401(k) elective deferrals, Roth 401(k) contributions are not excluded from box 1 of your W-2 and your permissible IRA contribution would be higher, perhaps with the combined amounts exceeding your $20,000 of earnings.

 

Regarding your second example, you can only make SEP-IRA contributions if it is from earnings from self-employment; SEP-IRA contributions are employer contributions.  The self employed must use a special calculation to determine the maximum amount that can be contributed to the SEP-IRA, so with $5000 of self-employment net profit your maximum SEP-IRA contribution would be 20% of the result of reducing $5,000 by the deductible amount of self-employment taxes.  In this case the deductible portion of self-employment taxes would be $354 and the maximum SEP-IRA contribution would be $929.  Subtracting these to amount from $5,000 would leave a maximum permissible IRA contribution of $3,717.