Is income contributed to a 457(b) subtracted from the earned income limit for an IRA?

[phildonnia1]

My wife and I are over age 50.

My wife had earned income from a job of $43k, and contributed $30k to a 457(b).

Now we want to max out our IRAs as well, at $8k each.

The IRS publication 590-A says my contribution is limited to:

1. The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts.

   1. Your spouse's IRA contribution for the year to a traditional IRA.

   2. Any contributions for the year to a Roth IRA on behalf of your spouse.

No mention of workplace plans.  So, my reading of this is that my contribution is limited to the gross income ($43k) minus her contribution ($8k), which allows me the full contribution ($8k) for myself.

But this doesn't seem right, because we would basically be putting $30k plus $16k in taxed advantaged accounts, which is more than her earned income.  I can't find anywhere that it mentions workplace plans in connection with IRA limits.  Am I understanding this right?

[dmertz · Accepted solution]

Pre-tax contributions to the 457(b) are already subtracted by the employer to come up with the amount that the employer reports in box 1 of the W-2.  These contributions are not to be subtracted a second time when determining the amount of compensation available to support IRA contributions.  The amount of wages shown on a W-2 that are able to support an IRA contribution are the amount in box 1 minus any amount in box 11.

If your wife earned $43k but deferred $30k to the traditional account in the 401(k) the employer would report only $13k in box 1 of the W-2.  Assuming that you have no compensation yourself and you file a joint tax return, that would mean that the IRA contributions by you and your wife combined will not be permitted to exceed $13k.

On the other hand, if your wife earned $73k and deferred $30k to the traditional account in the 457(b), that would result in $43k being reported in box 1 of the W-2 and would be plenty to support your wife's $8k IRA contribution and your spousal $8k IRA contribution combined.