What does "Deemed Roth IRA Under an Employer Plan" mean?

[hmosbergea]

2 questions:

Under IRA Contribution Worksheet: Regular Roth IRA Contributions:

Line 19 - What does "also include any contributions to deemed Roth IRAs under an employer plan" mean?

Taxpayer has contributed $4,000 thru qualified 401k plan thru work.

Can he still contribute additional $7,000 thru 1040 return?

[Skylane]

Contribution limits apply across the board....

you should include the contributions from made through the employer with any additional contributions. So, if max contribution is 7K then you have 3K left to be made and would enter total of 7K on line 19 of the worksheet. 

Answer to question 2 is no.

[hmosbergea]

Thank you for response.

Wouldn't you think ProSeries should account for this (it doesn't)?

W-2 has coded AA = 4,000 under box 12:

Designated Roth contributions under a section 401(k) plan.

[qbteachmt · Accepted solution]

"Wouldn't you think ProSeries should account for this (it doesn't)?"

Isn't that what you described? That the program has a place for you to enter this info.

The IRS has great reference materials.

From the W2 General Instructions guidelines for Box 12 codes:

"Designated Roth contributions.

Under section 402A, a participant in a section 401(k) plan, under a 403(b) salary reduction agreement, or in a governmental 457(b) plan that includes a qualified Roth contribution program, may elect to make designated Roth contributions to the plan or program in lieu of elective deferrals. Designated Roth contributions are subject to federal income tax withholding and social security and Medicare taxes (and railroad retirement taxes, if applicable) and must be reported in boxes 1, 3, and 5. (Use box 14 if railroad retirement taxes apply.)Section 402A requires separate reporting of the yearly designated Roth contributions. Designated Roth contributions to 401(k) plans will be reported using code AA in box 12"

"Taxpayer has contributed $4,000 thru qualified 401k plan thru work." <== seems to be Roth

"Can he still contribute additional $7,000 thru 1040 return?" <==into which type of account?

Everything matters: post-tax or pre-tax, employer or personal, in various combinations, plus this person's income level and age.

Have you read any web articles:

https://www.thebalance.com/are-you-eligible-to-contribute-to-a-401-k-and-a-roth-ira-2894148

https://www.investopedia.com/articles/personal-finance/071315/comparing-contribution-limits-roth-401...

https://www.investopedia.com/ask/answers/081414/can-i-contribute-roth-ira-and-still-participate-my-e...

https://www.investopedia.com/ask/answers/102714/what-are-roth-401k-contribution-limits.asp

The IRS has tables for this and articles, too.

[TaxGuyBill]

1) A "deemed" IRA is where an employer allows the employee to ALSO contribute to an IRA, in addition to the employer plan (such as a 401k). 

From the employee's perspective, it is a convenient way to contribute additional funds to retirement because it is all in area/brokerage with their employer. 

For tax purposes, it is treated just like any other IRA.  The contribution is NOT on the W-2 (except probably box 14 for informational purposes), so we enter it like any other IRA contribution.

2)  Maybe/probably.  If the employee's income is within limits for contributing to an IRA, YES, they can also contribute to the IRA, up to the maximum $6,000/$7,000 (assuming they meet the regular requirements, such as having enough taxable compensation).  Contributions to a 401k do not reduce that amount (for a Traditional IRA, be aware that an employer plan sets income limits for whether or not it is deductible or not).

[hmosbergea]

Thank you for your replies.

The last reference from "qbteachmt" ... investopodia gave the answer I was looking for.

Note to Skylane: see reference.

[Skylane]

@TaxGuyBill I think op is only referring to Roth contributions. Are you saying that in addition to the Roth 4K contribution through the employer, the TP can make an additional 7k contribution? Wouldn’t that constitute excess contributions?

[qbteachmt]

Please make sure when researching the provisions for the interactions of these retirement accounts and plan types, that you notice as applicable the specifics as Roth IRA or Roth 401(k) as these provisions differ. Any combination of these and Traditional IRA and any employer plan that provides one or more account type all needs to be very specifically considered along with the income limits and the participant's age.

[TaxGuyBill]

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@Skylane wrote:

@TaxGuyBill I think op is only referring to Roth contributions. Are you saying that in addition to the Roth 4K contribution through the employer, the TP can make an additional 7k contribution? Wouldn’t that constitute excess contributions?

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Employer retirement plans (such as a Roth 401k) have separate limits from IRA limits, and they do not really affect one another.

So yes, a taxpayer can make a Roth 401k contribution through his employer, and still make a $6000/$7000 Roth IRA contribution.  The 401k contribution (either Roth or tax-deferred) does not lower the limit for contributing to an IRA (assuming the taxpayer's income is within the allowable limits for making the contribution).

[hmosbergea]

Thanks for the advice. I agree.