roth 401k Contribution amounts

[lordparrotman]

I am looking to set up a mini Roth 401k plan for a client with for 2007. The situation is a one person business with a profit of approximately $25,000 and an employee spouse making approximately $10,000. Both are 50 years old. Cash is no problem. Am I correct in assuming that the wife can make a full $10,000 contribution and the business owner can make a contribution of $20,500 on his behalf? Is it also true that the business owner can contribute another $20,500 for himself and another $10,000 for the spouse as an employer match? Seems like a pretty good deal for socking away non taxable money for the future, don't you think? Any drawbacks other than giving up the tax deductions that would be available with a regular 401k?

[Brad Imsdahl]

It is true that the elective deferrals for a Roth 401(k) is the same as a regular 401(k) - $15,500 in 2007 for someone under 50, and $20,500 if age 50 or older.

What is NOT true is your employer match. 401(k) plans, including Roth 401(k) plans are limited to 25% of combined wages for all participants prior to the reduction for elective deferrals. That means if your combined wages for the business owner and spouse are only $35,000, the contribution limit for the employer match for all employees is $8,750.

The good thing is the wage is not reduced for the elective deferral when applying this limit. So the 25% wage limit applies to $35,000 regardless of how much the employees elected to defer.

Note: If the business owner is self employed, the 25% wage limit is reduced to 20% of net SE income after the one-half SE tax deduction. The employee spouse would still get the 25% of W-2 wage limit.

[New York Enrolled Agent]

Lordparrotman

One other caution - I believe the employer's match CANNOT be placed into the Roth 401(K). The match must be placed into a traditional (pre-tax) 401(k) account. I think Brad gave you the correct calculations but I just wanted to caution you based on what I inferred from your post.

[lordparrotman]

Clarification

So in this case, am I correct that the employee may contribute $10,000 to the plan and the employer may match that with an $8750 amount for the employee? The $8750 would then be a deductible amount for the owner on his Schedule C, right? The owner could then contribute $20,500 on his own behalf as well, which would go as a deduction from gross income on page one of the 1040, right? So the total going into the Roth 401k would be $39250, representing the maximum allowed. Do I have this about right?

[Brad Imsdahl]

no

If this is a Schedule C business, the employer’s match for a spouse employee of the Schedule C business owner would go on Schedule C as a deduction, but the employer’s match for the sole proprietor would have to go on the front of the 1040 as a contribution to a self employed plan. The two are not going to total $8,750 since you are going to be limited to the 20% of net SE income minus the one half of SE tax deduction.

The elective deferrals as designated Roth 401(k) contributions are after tax contributions, so they do not get deducted anywhere.

[lordparrotman]

ok

I think i got it now, thanks.....

[Brad Imsdahl]

One further point of clarification: When I said the designated Roth 401(k) contributions do not get deducted anywhere, I meant that in the sense of there being a separate retirement plan contribution category. They are not deducted separately as a retirement plan contribution because they are after tax contributions.

For the employee spouse, if she has $10,000 in gross W-2 wages, she can elect to defer up to $10,000 and have that money deposited into a designated Roth 401(k) plan. That elective deferral is not deducted separately as a retirement plan contribution, but the $10,000 of W-2 income is a deduction for the Schedule C business as wages paid. In contrast, the sole proprietor is self employed and not an employee. His elective deferral into a designated Roth 401(k) plan does not get deducted anywhere on the return, because sole proprietors cannot deduct their own owner’s withdrawals.

[sea-tax]

Lordparrotman

One other caution - I believe the employer's match CANNOT be placed into the Roth 401(K). The match must be placed into a traditional (pre-tax) 401(k) account. I think Brad gave you the correct calculations but I just wanted to caution you based on what I inferred from your post.

NY EA this is how I understand it as well. The employer portion goes into regular 401k and the employe can decide.