Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: If my client earns $20,000 and makes the maximum contribution of $17,500 towards her designated Roth 401(k), can she also contribute $5,500 to her Roth IRA, or is she limited at $2,500?

Answer: The IRS hasn’t addressed this issue, but based on the language of the Internal Revenue Code, we think the answer is yes; she can contribute the full $5,500 to her Roth IRA.

Code Section 219(b) tells us that the contribution limit toward a Roth IRA in 2014 is the lesser of:

(A)        $5,500 or

(B)        “an amount equal to the compensation includible in the individual’s gross income” in 2014 (emphasis added).

Elective deferrals to a traditional employer-sponsored plan of up to $17,500 are not includible in an employee’s gross income on the year. For example, if your client made a $17,500 elective deferral to a traditional 401(k) account, her IRA contribution limit would be reduced to $2,500—the amount of compensation includible in her gross income.

However, elective deferrals contributed to a designated Roth account are includible in gross income, and therefore shouldn’t reduce the limit imposed under Section 219(b). In other words, 100 percent of her compensation, $20,000, is includible in her gross income, and so the $5,500 limit applies (i.e. the lesser of the $5,500 limit and her $20,000 compensation that is includible in gross income).

It might seem like an odd result since your client is contributing more money ($23,000) to her retirement plans than she earns, but based on the statutory language, this should be allowed.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.