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
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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
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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
  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
  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
  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
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