DanTien said:
Ok, so if they do max out on 401k they can't fund a Roth with their money, but a gift Roth may work, but seek professional advice before doing?
Well, yeah, but the rules are in
IRS Pub 590 and a wealth of expertise & help can be found at
Ed Slott's IRA Help forum. You don't necessarily need to run to a paid professional.
Here's an example of what I'm trying to say. The numbers may not be right but the concepts are correct. The correct numbers are in the IRS pub.
IRAs, 401(k)s, SIMPLEs, and other individual retirement arrangements have to be funded with earned income. You can only put in as much income as you've earned, so if you only earn $5000 that year then (no matter how high the other limits are) you can only put $5000 in an IRA.
There are limits to what IRAs can be funded, what can be deducted, and whether or not a spouse's account can be funded. Generally if you make more than about $40K/year the limits start kicking in.
A problem with maxing IRAs with earned income is that you also have to live on that money. If someone (thanks, Dad!) gifts you with your living expenses, then you can devote a bigger portion of your earned income to your IRAs. Of course you can only do this up to the extent of your earned income.
So first a kid would fund their workplace 401(k)s, using their salary deductions, up to the employer match. Then they'd fund their Roth IRA and their spouse's Roth IRA. That's $5000/person in 2005, and if either of the "kids" are over 50 they get a catch-up contribution of an additional $500. They might decide to fund conventional IRAs instead, or a combination of the two, but the total limits are the same.
Then there's self-employment income. That can also be put into a self-employment IRA. That's a little more complicated than 401(k)s and Roth or conventional IRAs but it might also be a good deal. The Pub 590 rules cover the limits and whether or not it's a good deal after paying self-employment taxes.