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Do 401K and IRA companies comminicate?

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My brother recently got a job after not being employed for a whole year and has a lot of cash saved up. He will be making 15 thousand dollars when he starts in October and this will be his pay through the rest of the year via his employer. He was asking me but I did not have an answer, but is he allowed to put all of the 15 thousand in a 401k and then put five thousand in cash from his savings in an IRA?

Adding that this is in Maryland if that has any bearing on your answer.

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nyseGUY said:   My brother recently got a job after not being employed for a whole year and has a lot of cash saved up. He will be making 15 thousand dollars when he starts in October and this will be his pay through the rest of the year via his employer. He was asking me but I did not have an answer, but is he allowed to put all of the 15 thousand in a 401k and then put five thousand in cash from his savings in an IRA?

 

  The IRS contribution limit for a 401k is 18k. The employer's plan may have some restrictions; I have sometimes seen a maximum of 50% from each paycheck. At a minimum, he will need to pay SS/medicare tax, which will get deducted and the rest of the paycheck is what will get into his 401k (assuming he can put substantially all of it into the 401k).

Did he have any other earned income for the rest of the year (e.g., part-time pizza delivery, baby sitting whatever odd jobs to keep himself supported)

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For simplicity, let's just say he makes five thousand dollars a year after taxes and what not. Would he be able to put that whole five thousand in his 401k (let's say the company allows you to put any or all money in your 401k) as well as putting five thousand from his savings in his IRA?

The more I think about it, it seems like fraud but I am not entirely sure.

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Money put in a 401k is deducted from "box 1" wages on your W-2. So if he makes $15k and is able to put it all in the 401k, the W-2 will show zero wages and he will not be able to contribute to an IRA if that is his only income for the year.

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Fraud how? That's not fraud . he would be able to do that, but the employer probably wouldn't want to handle him paying them for withholdings. If he can manually adjust withholdings to $0 they might let him do 100%. I've had 99% of my paycheck (after withholdings though) set to go to retirement account in the past. Got ~$2 "take-home pay" to my checking account every 2 weeks. I didn't set withholdings to zero, though.
edit: right, see veranaco reply above.  Sum of both must not exceed gross pay.

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nyseGUY said:   For simplicity, let's just say he makes five thousand dollars a year after taxes and what not. Would he be able to put that whole five thousand in his 401k (let's say the company allows you to put any or all money in your 401k) as well as putting five thousand from his savings in his IRA?

The more I think about it, it seems like fraud but I am not entirely sure.

  I am fairly sure, no.
Box 1 in the W2 ("Wages, tips, other compensation") will exclude his 401k contribution. It will likely reflect a small amount corresponding to the taxes withheld (SS/medicare etc.). Assuming no other job/earned income for the year, the Box 1 amount is the max. he can contribute to an IRA.

ETA: vranaco said the same above but typed faster than me
ETA: Is your brother married and if yes, does the spouse have earned income?
 

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vranaco said:   Money put in a 401k is deducted from "box 1" wages on your W-2. So if he makes $15k and is able to put it all in the 401k, the W-2 will show zero wages and he will not be able to contribute to an IRA if that is his only income for the year.
  This is a good point....I did not ever think of this before. If he's in a position to have/want an HSA starting this tax year, the contributions would have the same effect as the 401k contributions. Also, I'm no tax expert, but he could probably avoid having any federal/state income tax deducted from his check so he has more for the 401k. At this point, as long as he doesn't owe the IRS over 1k for this tax year, there are no penalties- that is one exemption to the penalty. He can just pay his taxes in April 2018 with some of his backed up savings. Also, keep in mind the 401k deadline for 2017 is dec. 31 (or the check just prior). For an IRA you have until the filing deadline for this year in April 2018. Finally, keep in mind the saver's credit, as with that income I'm sure he'll qualify, and what I just said about owing the IRS wouldn't even apply at all b/c he would have a 0 liability. Do watch for your specific state's rules though about "underpaying" them throughout the tax year...

Edit: I'd almost say go for roth this year over the 401k, since it sounds like a "unique" situation for him if he goes to making 60k next year. Why get 15% this year when you get 25% on much of the 401k contribution limit next year in addition to a traditional IRA deduction?

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He has no other income, his savings and what he's living off of is almost $40k per year in after tax gifts he is getting from my mother and other relatives. So we are all happy to see him get this job but the gift money will still continue and thus why he has not use for the salary from the job.

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Since he won't owe much (if any) income tax this year, there's no advantage in contributing money to a pre-tax account. He should instead put it in after-tax accounts, like Roth IRA, after-tax 401k, or Roth 401k. If the last two are not available, he might even be better off putting the money in a regular after-tax individual brokerage account. Additionally, after-tax 401k contributions are not deducted from wages, but I'd guess that there must still be a rule that total retirement contributions can't exceed earned income....

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scripta said:   I'd guess that there must still be a rule that total retirement contributions can't exceed earned income....
  If he uses a Roth 401k, which he should given he makes so little as you point out, he can use the same earned income to also contribute to an IRA (which should be a Roth IRA likewise).  

https://www.bogleheads.org/forum/viewtopic.php?t=171237

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vranaco said:   Money put in a 401k is deducted from "box 1" wages on your W-2. So if he makes $15k and is able to put it all in the 401k, the W-2 will show zero wages and he will not be able to contribute to an IRA if that is his only income for the year.
 Only for a traditional 401k, not for a Roth 401k. 

https://www.bogleheads.org/forum/viewtopic.php?t=156724

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xerty said:   
scripta said:   I'd guess that there must still be a rule that total retirement contributions can't exceed earned income....
  If he uses a Roth 401k, which he should given he makes so little as you point out, he can use the same earned income to also contribute to an IRA (which should be a Roth IRA likewise).  

https://www.bogleheads.org/forum/viewtopic.php?t=171237
 

  

He might be able to, but it wouldn't be legal.

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taxmantoo said:   
xerty said:     If he uses a Roth 401k, which he should given he makes so little as you point out, he can use the same earned income to also contribute to an IRA (which should be a Roth IRA likewise).  
 


He might be able to, but it wouldn't be legal.

  Are you really sure about that?  It's not a common situation, but every careful discussion I've seen has concluded that earned income can be double counted in this way, legally, for Roth 401k and IRA contribution purposes.  Here's Fairmark on the topic as well:

http://fairmark.com/forum/read.php?2,83791,83806

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xerty said:   
taxmantoo said:   
xerty said:     If he uses a Roth 401k, which he should given he makes so little as you point out, he can use the same earned income to also contribute to an IRA (which should be a Roth IRA likewise).  
He might be able to, but it wouldn't be legal.

  Are you really sure about that?  It's not a common situation, but every careful discussion I've seen has concluded that earned income can be double counted in this way, legally, for Roth 401k and IRA contribution purposes.  Here's Fairmark on the topic as well:

http://fairmark.com/forum/read.php?2,83791,83806

xerty is absolutely correct. Compensation is what is necessary to contribute to an IRA. Traditional (pre-tax ) 401k contributions reduce compensation reported in your W-2 Box 1. Roth (post-tax) 401k contributions do not reduce compensation and will not affect the Box 1. Whatever is reported in box 1 except in rare circumstances is a safe harbor for IRA contributions. So it is most definitely possible to double dip Roth 401k/Roth IRA contributions. See IRS Publication 590-A, top of page 6, "What is Compensation?"

A correction to other information. A 401k deferral must be deducted from compensation not already paid. A 100% deferral is not possible for a W-2 employee. Other deductions; income tax withholding, employee share of FICA (7.65%), Section 125 cafeteria plan employee share deductions, etc... must come out first. What is left is the maximum possible deferral.

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