Can a taxpayer maximize retirement contributions by having both a 2024 IRA linked to an S Corporation and a 401(k) plan with a different employer?
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Yes, a taxpayer can generally maximize retirement contributions by contributing to both an IRA (Traditional or Roth) and a 401(k) plan, even if the IRA is associated with compensation from an S Corporation and the 401(k) is with a different employer. However, there are important legal and practical considerations, including contribution limits, deductibility, and the definition of compensation, that must be observed.
1. Contribution Limits: Separate and Cumulative
IRA Contribution Limits (2024):- The maximum contribution to all IRAs (Traditional and Roth combined) is $7,000 for 2024, or $8,000 if age 50 or older by year-end.- This limit applies regardless of how many IRAs you have or the number of employers.
401(k) Contribution Limits (2024):- The employee elective deferral limit for 401(k) plans is $23,000 for 2024, or $30,500 if age 50 or older (including the $7,500 catch-up).- This limit is per individual, not per plan. If you have multiple 401(k) plans with different employers, your total elective deferrals across all plans cannot exceed this limit.
Combined Limits:- The IRA and 401(k) limits are independent. You can contribute the maximum to both, provided you have sufficient earned income to support the IRA contribution.
2. Compensation and S Corporation Considerations
IRA Compensation:- To contribute to an IRA, you must have taxable compensation (earned income). For S Corporation shareholders, only wages reported on Form W-2 (not distributions or K-1 income) count as compensation for IRA purposes.- If you are an owner-employee of the S Corporation, you must pay yourself a reasonable salary, reported on Form W-2, to be eligible to make IRA contributions.
401(k) Compensation:- 401(k) contributions are made through salary deferral from compensation with the employer sponsoring the plan. If you have a 401(k) with a different employer, your elective deferrals are based on your compensation from that employer.
3. Deductibility and Income Phase-Outs
Traditional IRA Deductibility:- If you (or your spouse) are covered by a workplace retirement plan (such as a 401(k)), the deductibility of your Traditional IRA contribution may be limited based on your modified adjusted gross income (MAGI) and filing status.- For 2024, the deduction phases out for single filers with MAGI between $77,000 and $87,000, and for married filing jointly between $123,000 and $143,000 (if the contributor is covered by a plan).
Roth IRA Contribution Eligibility:- Roth IRA contributions are also subject to MAGI phase-out ranges. For 2024, the phase-out for single filers is $146,000 to $161,000, and for married filing jointly $230,000 to $240,000.
401(k) Deductibility:- 401(k) contributions are made pre-tax (unless designated as Roth contributions) and reduce your taxable income, subject to the annual limit.
4. Multiple Plans and Aggregation Rules
- If you participate in multiple 401(k) plans (e.g., one with your S Corporation and one with another employer), your total elective deferrals across all plans cannot exceed the annual limit. However, employer contributions (such as matching or profit-sharing) are subject to separate overall limits per plan.
- The overall defined contribution limit (including employee and employer contributions) is $69,000 for 2024 per employer plan.
5. Practical Example
Suppose you are an S Corporation owner-employee and pay yourself a W-2 salary. You can:- Contribute up to $7,000 ($8,000 if 50+) to a Traditional or Roth IRA, provided you have at least that much in W-2 wages from the S Corporation.- Contribute up to $23,000 ($30,500 if 50+) in elective deferrals to a 401(k) plan with a different employer, subject to the combined limit across all 401(k) plans.- If you are not covered by a 401(k) plan at the S Corporation, your IRA deduction is not subject to the phase-out for active participants.
6. Key Caveats
- You cannot exceed the annual elective deferral limit across all 401(k) plans, regardless of the number of employers.
- The IRA contribution limit is not increased by having multiple sources of compensation or multiple IRAs.
- If you are considered an active participant in any employer plan, the IRA deduction phase-out applies.
- Only W-2 wages from the S Corporation count as compensation for IRA purposes, not S Corporation distributions.
Summary: A taxpayer can maximize retirement contributions by contributing the maximum allowed to both an IRA (Traditional or Roth) and a 401(k) plan with a different employer, provided they have sufficient earned income and do not exceed the respective annual limits. The deductibility of IRA contributions may be affected if the taxpayer is an active participant in a 401(k) or other employer plan, and the total elective deferrals to all 401(k) plans must not exceed the annual limit.
If you have specific circumstances (such as self-employment income, multiple businesses, or questions about SEP or SIMPLE IRAs), additional rules may apply. Please provide more details if you need guidance on those situations.
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