How do contribution limits apply if a taxpayer has a 2024 IRA through an S Corporation and a 401(k) plan with another employer?

When a taxpayer participates in both an IRA (such as a Traditional or Roth IRA) and a 401(k) plan in the same tax year, the contribution limits for each account are generally determined separately, but there are important coordination rules and deductibility considerations to be aware of, especially if the IRA is established through an S Corporation and the 401(k) is with another employer.

1. IRA Contribution Limits (2024)

For 2024, the maximum contribution to all IRAs (Traditional and Roth combined) is the lesser of:- $7,000 ($8,000 if age 50 or older by year-end), or- The taxpayer’s taxable compensation for the year.

This limit applies regardless of how many IRAs the taxpayer has or whether the IRA is set up through an S Corporation or otherwise. If the taxpayer is age 50 or older, the catch-up contribution is $1,000, making the total $8,000 for 2024.

2. 401(k) Contribution Limits (2024)

For 2024, the employee elective deferral limit for 401(k) plans is:- $23,000, plus- An additional $7,500 catch-up contribution if the taxpayer is age 50 or older, for a total of $30,500.

This limit applies to the total elective deferrals made to all 401(k), 403(b), SIMPLE, and similar plans in aggregate for the year, regardless of how many employers the taxpayer works for.

3. Coordination of Limits

a. IRA and 401(k) Limits Are Separate

• The IRA contribution limit is separate from the 401(k) elective deferral limit. A taxpayer can contribute the maximum to both an IRA and a 401(k) in the same year, provided they have sufficient compensation to support both contributions.

b. Deductibility of Traditional IRA Contributions

• If the taxpayer (or their spouse) is covered by a workplace retirement plan (such as a 401(k)), the deductibility of Traditional IRA contributions may be limited based on the taxpayer’s modified adjusted gross income (MAGI) and filing status.
• For 2024, if the taxpayer is covered by a 401(k) plan, the deduction for Traditional IRA contributions phases out as follows:
• Single or Head of Household: $77,000–$87,000
• Married Filing Jointly (taxpayer covered): $123,000–$143,000
• Married Filing Jointly (spouse covered, taxpayer not): $230,000–$240,000
• Married Filing Separately: $0–$10,000.
• If the taxpayer’s MAGI is below the phase-out range, the IRA contribution is fully deductible. If within the range, the deduction is partial. If above, the contribution is not deductible, but nondeductible contributions can still be made up to the limit.

c. Roth IRA Contributions

• The ability to contribute to a Roth IRA is also subject to MAGI phase-out ranges:
• Single/Head of Household: $146,000–$161,000
• Married Filing Jointly: $230,000–$240,000
• Married Filing Separately: $0–$10,000.
• If MAGI is below the range, the full contribution is allowed; within the range, a partial contribution is allowed; above the range, no contribution is allowed.

4. S Corporation IRA Considerations

• If the IRA is established through an S Corporation, the contribution is still subject to the same annual limits as above. For SEP IRAs (a type of employer-sponsored IRA), the contribution limits are higher, but for a regular Traditional or Roth IRA, the standard limits apply.
• If the taxpayer is an owner-employee of the S Corporation, only compensation reported as wages (not distributions) can be used to support IRA contributions.

5. Multiple Employer Plans

• If the taxpayer participates in 401(k) plans with more than one employer, the elective deferral limit ($23,000 for 2024) applies to the total deferrals across all plans. However, the overall annual addition limit (including employer contributions) applies separately to each unrelated employer’s plan.

6. Summary of Application

• The taxpayer can contribute up to $7,000 ($8,000 if 50+) to IRAs (Traditional and/or Roth, combined) for 2024, subject to compensation and MAGI limits.
• The taxpayer can defer up to $23,000 ($30,500 if 50+) to 401(k) plans in total for 2024, regardless of the number of employers.
• The deductibility of Traditional IRA contributions may be reduced or eliminated if the taxpayer is covered by a 401(k) and their income exceeds the applicable phase-out range.
• Roth IRA contributions are also subject to income phase-outs.
• The S Corporation status does not increase the IRA contribution limit; it only affects what counts as compensation for IRA purposes.

Example

If a 45-year-old taxpayer earns $60,000 in W-2 wages from an S Corporation (where they own shares) and $80,000 from another employer with a 401(k) plan:- They may contribute up to $7,000 to their IRA (Traditional or Roth, or split between both, subject to MAGI limits).- They may defer up to $23,000 to the 401(k) plan (or split between multiple 401(k) plans, but the total cannot exceed $23,000).- If they are covered by the 401(k), the deductibility of any Traditional IRA contribution depends on their total MAGI and filing status.

In summary: The IRA and 401(k) contribution limits are separate and not reduced by each other, but deductibility and eligibility for certain types of contributions may be affected by participation in both types of plans and by income level.

If you need information about SEP IRAs or SIMPLE IRAs, or if the S Corporation is making employer contributions to a SEP or SIMPLE IRA, please specify, as those have different limits and rules.