IRA/Keogh Limits

Discussion in 'Tax' started by Hank Youngerman, Dec 22, 2014.

  1. In 2014, I had very little income. (I was unemployed at the start of the year, was looking for a job, and when nothing materialized, decided to stop looking and semi-retire.) For 2014, my only earned income will be about $10K (net) on Schedule C.

    At the start of the year I did a backdoor Roth contribution for $6500.

    So my questions are:

    1) I initially didn't expect to be eligible to make deductible IRA contributions, but I guess I will be. Do I now technically report the initial IRA contribution as deductible, and then the converted amount as taxable income? It's a wash anyway compared to what I used to do, which is report it as non-deductible but then the conversion was non-taxable since the cost basis was 100% of the converted amount.

    2) How much can I put in my Keogh, $3500 or $10,000? $3500 seems like the sensible number, but I'm still showing $10K income on Schedule C.
     
    Hank Youngerman, Dec 22, 2014
    #1
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  2. Hank Youngerman

    Mark Bole Guest

    You're right, it's a wash. I don't believe you are required to take a
    deduction for a Trad. IRA contribution even if eligible, so you seem to
    have a choice of which way to report it, the way you are used to, or as
    a tax deduction offset with taxable conversion income.

    As for the self-employed retirement contribution, isn't "Keogh" a
    generic term? I'd expect your plan is either some type of IRA, or a
    solo 401k, the rules are different. With a solo 401k, you can make a
    "salary deferral" contribution that in your case could offset most of
    your Sched C net profit (the calculation takes into account your SE tax
    and other items to put you on a par with a regular employee making a
    401k contribution under an employer plan). It doesn't show up on
    Schedule C, but rather on the front page of the 1040.
     
    Mark Bole, Dec 22, 2014
    #2
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  3. I have a solo 401(k).

    Since the contribution, as you said, shows up on the 1040 and not Schedule C, I still have $10K of income showing on Schedule C. That's why it seemed I might be able to take both the IRA deduction and make the self-employed plan contribution.

    Can I?

    It actually kind of super-charges my return, because my plan is to do a Roth conversion to bring my income up to the top of the 15% bracket. So if I put the extra $6500 in my solo 401(k) I will also Roth convert another $6500.
     
    Hank Youngerman, Dec 23, 2014
    #3
  4. Hank Youngerman

    Alan Guest

    If I understand this correctly, you already made the maximum
    contribution to an IRA ($6500 at the start of the year which you then
    converted to a Roth). You have an HR 10 qualified plan (Solo 401K).
    This allows you to make an elective deferral based on your net earnings.
    For this purpose (elective deferrals), I believe the definition is your
    net income from Sched. C less the deduction for 1/2 of your SE tax
    limited by the 401K annual maximum. If you make an elective deferral to
    your 401K, you could perform a Roth conversion only if the written plan
    allows for in-service distributions (a distribution while still employed).
     
    Alan, Dec 23, 2014
    #4
  5. Thank you Alan.

    Your understanding is correct. So apparently I can make the $9500 contribution notwithstanding the IRA contribution?

    The Roth conversion is inside a former employer's plan, which does allow conversions of this sort.
     
    Hank Youngerman, Dec 25, 2014
    #5
  6. Hank Youngerman

    Alan Guest

    Traditional IRAs and qualified plans are two different animals. You can
    use the same earnings to compute an elective deferral to a qualified
    plan and a voluntary contribution to your IRA.
     
    Alan, Dec 26, 2014
    #6
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