2011 401k & Roth IRA Contribution Limits

[WolfNoMate]

I have a question on the 2011 limits for contributions to a 401k and a Roth IRA.

For info purposes: Married, over age 50, approx. $85,000 Foreign Earned Income, approx. $23,000 military retirement income, Roth IRA, spouse Roth IRA, 401k

I have read most everything I can search up on the IRS website and I repeatedly find:

Roth IRA - $5000 + $1000 catch-up if age 50 or over ($6,000)
401k - $16,500 + $5,500 catch-up if age 50 or over ($22,000)

Having researched this information, I keep reading/hearing the limit is $22,000 COMBINED if age 50 or over, not $28,000. I can find nothing in the IRS pubs that back this up. This is the first year I have been able to come close to the limits and thought I had a firm understanding of how much could go where.

It would seem this is two different pots of money as a 401k contribution is pre-tax and a Roth IRA contribution is post-tax. I can easily understand this being the case if I were contributing to a traditional IRA.

If this is true, can someone point me to the relevant IRS pub? Are there penalties if you have over contributed? What can be done to correct an over contribution?

As we are dealing with the IRS, I am well aware that common sense does not always prevail, hence this question. I am beginning to believe when it comes to taxes and the IRS, the more I learn, the less I know.

[mwcpa]

"85,000 Foreign Earned Income"

If you have 85K in qualified foreign earned income (meaning you live overseas and can exclude this amount from US taxation) why would you want to defer salary to a period where it would possibly be taxable....or are you opting for the "credit" on taxes paid to the foreign local?

you cannot offset the pension income with a retirement contributions as it is not deemed "earned" income.

[Savoir Faire-Demogague in NJ]

Oct 24, 2011 5:08:54 GMT -5 mwcpa said:

"85,000 Foreign Earned Income"

If you have 85K in qualified foreign earned income (meaning you live overseas and can exclude this amount from US taxation) why would you want to defer salary to a period where it would possibly be taxable....or are you opting for the "credit" on taxes paid to the foreign local?

you cannot offset the pension income with a retirement contributions as it is not deemed "earned" income.

Well the Roth IRA is post-tax contributions. When you withdraw from a Roth, these funds are tax free. I defer to you on whether the poster is eligible for a Roth with foreign income.

Likewise, it may be possible the poster can fund a Roth 401K.

[WolfNoMate]

Thank you, mwcpa and Savoir Faire for your replies.

My investing plans were to fund our Roth IRAs and the 401k with what is in effect tax-free money. The IRAs are currently funded from my military retirement check and we live off my overseas income as well as use it to fund the 401k.

I work for an American company doing work overseas and have been contributing more than enough to a 401k to get the company match. I pay no foreign taxes and as my overseas pay is under the IRS limit, I pay no taxes on it. I do pay income taxes on my military retirement.

I had not considered, as mwcpa pointed out, that I was funding an account with tax-free income, which would be taxed at a future time. Doh! Talk about the forest and the trees. I’m now thinking that the 401k should be funded with enough to get the company match and invest the rest elsewhere.

As you can see by the OP my concern was not exceeding the IRA and 401k limits. It now appears there are more cards in this deck than I first thought.

Any advice would be appreciated. I understand there are NO guarantees in the investing world and don’t expect any.

I will not be back in the US until around Christmas, but I think I need a financial advisor. I have read that a “fee-only” financial advisor will give less biased info as they are not trying to sell anything other than their advice.

Thoughts?

[mwcpa]

if you "earned" 85K and utilized the foreign earned income deduction you CANNOT fund an IRA (or Roth IRA) to the extent that the "compensation" income is not taxable....

from IRS.gov "must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment" www.irs.gov/taxtopics/tc451.html

let's take a simple example...

Makes 85,000 as noted above by the poster.
Avails himself of the foreign earned income exclusion since all the requirements were met... in this case this amount would be 85,000 (assuming no income is allocable to the US for any days worked in the US).
Taxable "compensation" is now 0 (85 salary less 85 exclusion).
Since their is NO taxable compensation there is no IRA (or Roth IRA) allowed.

Sorry.

[WolfNoMate]

MWCPA,

Having read Tax Topics 451 & 309 and parts of Pub 590, I now see how I cannot fund an IRA. Per Pub 590, my military retirement is considered a "pension or annuity" and cannot be used to fund an IRA, even though it is taxed. I was considering this as the "taxable compensation" needed to be able to fund an IRA.

So to sum all this up:

1. I cannot contribute to an IRA as I have no "taxable compensation" as determined by the IRS.

2. I can invest in stocks, bonds, mutual funds, REITs, real estate, precious metals, savings accounts, etc. with no problems.

3. I can invest in a 401k, but will be putting untaxed money into an account that will be taxed later. I think I see the point here, as any stock/mutual fund I buy and sell will only incur taxes on the "profits" after the basis cost is subtracted. (short/long term capital gains)?

I guess my next question is how do I get my contributions to the IRA's back and are there any tax implications to getting them back. I know better than to say I don't see any at this point. I am looking in Pub 590 for this info. I you have a ready reference, it would be appreciated.

Again, thank you for sharing your knowledge and insight on this.

[mwcpa]

"I cannot contribute to an IRA as I have no "taxable compensation" as determined by the IRS."

Actually, Congress came up with this rule, not the IRS, the IRS just has the task of trying to administer the laws that Congress (and the lobbyists) wrote.... one should really try to read some sections of the law.... it's amazing how poorly and unclear our elected officials can write (I guess it is par for the course since most of them can never give a staright answer or change the subject, been watching bits of the debates recently, I have never seen so much double talk in my life, but that's a different topic)

"I can invest in a 401k, but will be putting untaxed money into an account that will be taxed later. I think I see the point here, as any stock/mutual fund I buy and sell will only incur taxes on the "profits" after the basis cost is subtracted. (short/long term capital gains)?"

That is correct.... but if you happen to earn over the "excluded" amount or have US working days that are not eligible for the exclusion those amounts are eligible for an IRA.

"I guess my next question is how do I get my contributions to the IRA's back and are there any tax implications to getting them back"

Call the broker, bank, etc and tell them you made an error and the IRA was funded in error.

If the funding was for 2011, you will pay tax on any gain in the account.

If the funding was for 2010 or prior and you claimed the deduction for the IRA you better find a qualified tax professional because things will get hairy.

If the account was a Roth for 2011, have the money's returned and you will pay tax on any "appreciation"

And, like the regular IRA note above, see a professional if the contributions were for 2010 and prior, you may have big troubles (including possible excise taxes for funding an IRA improperly)

[Savoir Faire-Demogague in NJ]

Actually, Congress came up with this rule, not the IRS, the IRS just has the task of trying to administer the laws that Congress (and the lobbyists) wrote.... one should really try to read some sections of the law.... it's amazing how poorly and unclear our elected officials can write (I guess it is par for the course since most of them can never give a staright answer or change the subject, been watching bits of the debates recently, I have never seen so much double talk in my life, but that's a different topic)

The IRS is also charged with interpreting the tax code written by congress. My firm is in the tax compliance business and we routinely have ongoing communication with the local IRS office concerning matters we deal with.
It is not uncommon to have matters take numerous years to get a clear and concise IRS opinion on parts of the tax code, so we can have some guidance on how to proceed.

[TheOtherMe]

Because of how Washington and our politics work, there are code sections that only apply to one specific company or one specific set of circumstances.