Roth 403(b), Roth IRA and 'earned income'

[ERD50]

I just got off the phone with Fidelity, they are pointing me to the IRS. I don't blame them, but I'm frustrated that these things just are not as simple as they should be. I dread calling the iRS, have looked through the web and they touch on this but do not seem to answer it directly. Can anyone help?

My situation:

A) Wife works for the school district. The school now offers a Roth 403(b) and Fidelity is one of the administrators we can choose. So far so good.

B) I have no earned income, only investment income. My wife is not full-year, and is in a clerical position so income is low ~ $15K annually (but she enjoys the work). OK.

C) We contribute the max to our Roth IRAs. You can only contribute up to your joint earned income. So at $10K ($5K each), we are within the limits of her ~ $15K earned income. Still OK.

Here is the question:

If we have all of my wife's income go to the Roth 403(b), can we still make contributions to our Roth IRA's? Or does that 403(b) contribution make that money not available to 'count' as 'earned income' for a Roth IRA?

About the only thing definitive that I got from the IRS web and from Fidelity is that the (above age 50) contribution limits of $20K for Roth 403(b)s and $5K (each) for Roth IRA are independent of each other. But the 'earned income' thing is drawing blanks.

Since the Roth 403(b) is taxed money, I am guessing that I can do both, even though her take home pay will show near zero*.

TIA - ERD50

* Not a tax problem, but I still need to convince my wife that she is 'making money' even when her paycheck is 27 cents. I'll manage, even if it means direct deposits from our investment accounts to her account to match her contributions.

 

[packrat44]

Things that make you say "Hummmm?".

 

[gindie]

Info. is from Page 8 "What is Compensation" of IRS Publication 590 at:
http://www.irs.ustreas.gov/pub/irs-pdf/p590.pdf

It says you use Box 1 of your W-2 to determine your earned income. In your case, that should be the full $15K

 

[ERD50]

Thanks gindie. Even with your help, that ran me in circles a bit. The section you ref is for Trad IRA, but the section on Roths refs back to it.

So, it looks like 'yes'. She can put all her salary into a Roth 403(b), AND we can put money (up to her salary, and other ROTH limits) into Roth IRAs.

thanks - ERD50

wheew!

 

[packrat44]

So, it looks like 'yes'. She can put all her salary into a Roth 403(b), AND we can put money (up to her salary, and other ROTH limits) into Roth IRAs.

thanks - ERD50

wheew!

But will the IRS say you are double counting by using the same compensation figure for both the 403(b) and your TIRAs?

It would be nice to get a written clarification from the IRS so if they squack later you can show you used due diligence.

 

[ERD50]

But will the IRS say you are double counting by using the same compensation figure for both the 403(b) and your TIRAs?

It would be nice to get a written clarification from the IRS so if they squack later you can show you used due diligence.

note: they are both Roths that I'm looking at, a Roth 403(b) and a Roth IRA - not trad-IRAs (if it makes a difference - I have not looked at trad-IRA rules in a while).

Well, as gindie pointed out, the IRS docs say use the number from BOX 1 of the W2 for earned income. So it does stand to reason that if the Roth 403(b) contributions constituted double-dipping, they would subtract them from Box 1. Or, add them to box 11, which gets subtracted from box 1.

The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.

Since I have not done this yet, I don't know what the W-2 will look like, but I assume salary still shows up in Box 1, whether it was deposited to a Roth 403(b) or paid out in cash.

How does one go about getting written clarification from the IRS? And don't they say that even they don't know the tax code either? Though you are right, it does show due diligence.

I'm sure this will be much clearer when I actually do the taxes, just trying to plan and anticipate.

thanks -ERD50

 

[Martha]

Unless the IRS has already issued regs or a ruling, the only way to get written clarification from the IRS is to get a private letter ruling which will cost you a lot of money.

Calling an IRS agent may or may not give you a correct answer and if it is wrong you can't hold them to it.

Ask a tax accountant and see what he or she thinks.

 

[ERD50]

Calling an IRS agent may or may not give you a correct answer and if it is wrong you can't hold them to it.

Ask a tax accountant and see what he or she thinks.

Thanks Martha. I know what you say is true, I have heard it many times, but it always causes me to shake my head in amazement.

What does it say about our tax system when the IRS cannot even stand behind what they say?

And why should I need to pay someone to figure out what they might mean (since not even they are sure)? But you are correct, that IS the way it is. Sad. Very sad.

I remember years ago, they interviewed the head of the IRS on 60 Minutes. He said he was not able to do his own taxes - he had to hire someone (not 'choose' to hire someone - but felt he 'had' to)! As he explained, it is not so much the IRS's fault - it is Congress that passes all these convoluted, intertwined, interdependent, conflicting, and often counter-productive rules.

But, shouldn't the head of the IRS present a 'State of the IRS' address to Congress each year? That address could spell out a top-ten list of the items needing to be rectified to reduce taxpayer compliance burdens, and IRS issues. I have never heard of such an address, but maybe it happens?

I have no problem contributing tax dollars to the system, it is my responsibility. Even with my Libertarian leanings, I'm in favor of a moderately 'progressive' tax system. But I rail against making that collection system complex, and with unknowns (sunset clauses) that make tax planning near impossible. rant over - for now.

-ERD50

 

[ats5g]

You can check out the How much can be contributed to a Roth IRA. Scroll down a little to get to Worksheet 2-1, to figure your modified adjusted gross income.

Personally, I don't think the IRS would allow putting all your wife's income in a Roth 403(b) and then putting non-income in a Roth IRA. If your wife was putting all her income into a regular 403(b), would she have any taxable income at all to qualify you/her to contribute to a Roth IRA? If no, then why would a Roth 403(b) suddenly change this?

- Alec

 

[ziggy29]

I am not a tax professional. But I believe that "earned income" would not include earned income already deferred into a 403(b) or 401(k) plan. After all, many people contribute as much as they can to the 401k/403b in order to be able to get AGI down enough to contribute to a Roth, yes? So if these contributions are excluded from income for the purposes of Roth eligibility, I doubt the IRS would let us have it both ways, even if we're talking about a Roth 403(b) and not a traditional one. But I digress.

 

[ERD50]

You can check out the How much can be contributed to a Roth IRA. Scroll down a little to get to Worksheet 2-1, to figure your modified adjusted gross income.

Personally, I don't think the IRS would allow putting all your wife's income in a Roth 403(b) and then putting non-income in a Roth IRA.

- Alec

Thanks, Alec. That worksheet seems to place no limits on this idea - assuming that the income shows up in BOX 1 of the W-2, even if it had all gone to a Roth 403(b). Nowhere does it say 'enter amounts contributed to a Roth 403(b)'. I put my estimated #'s in and it appears that I would still be eligible for Roth IRA contributions.

Well, technically I put 'non-income' money into my Roth IRA - the money comes from my investment account. But, on paper you need to have 'earned income' to do it. So, it really comes down to whether the IRS says that salary counts as 'earned income' even if it all went to funding a Roth 403(b). Hey, I didn't write the rules, just trying to (legally) make the most of them. Which is a crapshoot anyhow, because who knows what tests they might put on Roths in the future. But that is fuel for a another rant.

So maybe another way to ask this, armed with the feedback I have so far, is:

Did anyone out there in forum-land contribute to a Roth 403(b) in 2006?

If so, was BOX 1 of your W-2 reduced by the amount of your 403(b) contribution, or was an adjustment made to BOX 11?

(repeating for clarity - Quote:

The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.

Thanks again - ERD50

PS - ziggy, there is the Trad IRA vs Roth factor influencing what you say.

 

[ERD50]

I found this on the web (guy seems to have good credentials):

THE WANDERING TAX PRO: December 2006

While contributions to “traditional” 401(k) plans are considered “pre-tax”, ROTH 401(k) contributions are made with “after-tax” dollars. Contributions to a ROTH 401(k) will not reduce the amount of taxable wages reported on Box 1 of your Form W-2.

I'd assume that the terms 'Roth 401(k) and Roth 403(b) would be interchangeable, they are 'sisters' as he states later in the article.

-ERD50

 

[youbet]

If so, was BOX 1 of your W-2 reduced by the amount of your 403(b) contribution, or was an adjustment made to BOX 11?

The school district business manager may be able to answer your question as to how the contribution to the Roth 403(b) will impact BOX 1. Give him/her a call.

Edited to add: Don't drag the subject of the Roth IRA into the question. The business manager won't want to give you tax advise. Just ask about how they calculate the BOX 1 amount for employees who contribute to a Roth 403(b). The business manager is reponsible for issuing compliant W2's for the school district and should know the answer to your question.

 

[ERD50]

The school district business manager may be able to answer your question as to how the contribution to the Roth 403(b) will impact BOX 1. Give him/her a call.

Edited to add: Don't drag the subject of the Roth IRA into the question.

Yes, I think I can do that at this point. I know enough know to be able to leave the Roth IRA out of the question for them.

The email announcement basically said 'call your tax advisor, etc, etc, etc'. But, now that it is down to the question of boxes on the W-2, they may be able to answer that. I'll give it a try. Although, I also would not be surprised if they just figure their payroll SW will handle it - they may not know in advance. But I'll try.

-ERD50

 

[packrat44]

But will the IRS say you are double counting by using the same compensation figure for both the 403(b) and your TIRAs?

Typo error. Mind said RIRAs, fingers typed TIRAs.

I found this on the web (guy seems to have good credentials):

THE WANDERING TAX PRO: December 2006

I'd assume that the terms 'Roth 401(k) and Roth 403(b) would be interchangeable, they are 'sisters' as he states later in the article.

-ERD50

This article did not address your particulars.

Many years ago I had a sticky question while doing my daughters taxes. When I presented the question to the IRS I was passed through about 5 tax specialists until I had one who was their expert on the subject. While he would not put his determination in writing, he did give me his full name which I documented with the other particulars. If the IRS came back later and disallowed the decision, at least I would have recourse in not paying a penalty.

 

[kensiky]

I hope you have found your answer. But you might also consider Making a Spousal IRA Contributions. Since your wife makes a low income it may be possible for you to use your income to fund her Roth IRA. There are some restrictions like you must me married and be filing a joint return.

 

[Sandy]

Just talked iwth my brother who is a CPA. If your wife only earns $20k and puts all of it into a 403b she can't put any $$ into a roth. If she earns $30k and puts $20K into a 403b, then she can put $5k into a roth and you can put $5k into a spousal roth.

The key here is taxable earnings, even for a roth. You can't put away more than your taxable earnings.