Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
K-1 plus W-2 - Determine Roth MAGI
Posted by: wheniwork, October 25, 2008 10:07PM
Hi,

I am a partner of an S Corp and receive a k-1 at the end of the year. I am also an employee of the same corporation and receive a w-2.

I am looking for clarification as to what my MAGI is in regards my Roth IRA contribution limits. I read on this website that k-1 income does not count toward my income limits for Roth contribution limits. See this page: [www.fairmark.com]

My AGI with my k-1 is bit over the income limit but without it, it's well with-in the income limit. So is it safe for me to contribute the $5k max to my Roth since apparently the k-1 income doesn't count towards my Roth MAGI?

This is the only website I've found that suggests that k-1 income doesn't count towards income limits for Roth contributions.

Any clarification and help is appreciated.

Re: K-1 plus W-2 - Determine Roth MAGI
Posted by: edh, October 25, 2008 11:56PM
You are mixing up "qualifying income" and AGI limits.

Two completely different rules:

(1) Your IRA contribution (either Roth or traditional) is limited to the amount of earned ("qualifying") income you have for the year. In general, earned income is the income reported on a W-2 or as self-employment income. It does not include any income reported on a K-1 from a Sub S corporation.

(Notes: Some items from a partnership K-1 are considered earned income for this purpose. Also, taxable alimony is treated as earned income for this purpose. If your spouse has qualifying earned income, you might be able to contribute based on the spousal IRA rules.)

Example: Your only qualifying income is $3000 of w-2 wages. The most you can contribute to an IRA is $3000.

Example: You are single and have no earned income. You can contribute zero to an IRA.

Example: You are married and have $60,000 of wages (shown on a W-2) for the year and are under age 50. You can contribute $5000 to an IRA for 2008. This is maximum contribution permitted.

All of the above examples assume your modified adjusted gross income (MAGI) is small enough that it is not a factor.

(2) You cannot contribute to a Roth IRA if your "modified AGI" is over a specified amount. (There is a phase in, so there is a range in which some {but less than the maximum} contribution is allowed. For example, for a married couple, Roth contributions phase out between $159,000 and $169,000 (for 2008) of modified agi.

Modified Adusted Gross Income (MAGI) is the adjusted gross income as shown on your tax return for the year modified by certain other items shown on your tax return. For example, MAGI for this purpose does not include the deduction for student loan interest or the tuition & fees deduction.

Example: You are married and file joinly, under 50, and have a MAGI of $170,000 (including items from a K-1 from a Sub S corp). You are not permitted to contribute to a Roth IRA since you are above the upper end of the phaseout.

Example: Same situation, except your MAGI is $140,000. Part of your AGI is from a $50,000 W-2. You are permitted to contribute up to $5000 to a Roth IRA for 2008.

Example: Same as above, except your MAGI is $163,000. Since you have earned income and are below the upper limit of the phase out, you are permitted to contribute some to a Roth IRA -- but not the full $5000.


In short, there are two different tests that must be met in order to contribute to a Roth.


Re: K-1 plus W-2 - Determine Roth MAGI
Posted by: wheniwork, October 26, 2008 12:56AM
Thanks for the info. So let-s say I'm single and my W-2 is $80k and my K-1 is $50k. Can I contribute the full $5k to my Roth?

Thanks in advance.

Re: K-1 plus W-2 - Determine Roth MAGI
Posted by: edh, October 26, 2008 01:24AM
No.

You have more than $5000 of earned income, so that is no problem.
But your AGI is $130,000. This is over the $116,000 upper limit of the 2008 Roth phase out range for a single individual.

If you were not covered by any type of retirement plan for any period during the year, you could make a deductible traditional IRA contribution.
If you were covered by a retirement plan, then the only thing you are left with is a non-deductible traditional IRA contribution.

Re: K-1 plus W-2 - Determine Roth MAGI
Posted by: wheniwork, October 26, 2008 02:35AM
Ok. But what confuses me is this bit of information that I found on this site: [www.fairmark.com]

===START QUOTED TEXT FROM THIS WEBSITE===
S Corporations

If you own stock in an S corporation, you'll receive a Schedule K-1 similar to the one you would receive as a member of a partnership. But income you receive as a shareholder of an S corporation is not qualifying income. If you are also an employee of the S corporation, your qualifying income includes amounts earned as an employee, as explained earlier.
===END QUOTED TEXT FROM THIS WEBSITE===

To me that sounds like my K-1 income that I receive as a shareholder is NOT qualifying income for Roth income limits. Am I missing something?

Thanks again.

Re: K-1 plus W-2 - Determine Roth MAGI
Posted by: Art, October 26, 2008 03:15AM
Correct. The K-1 income from the S-Corp is not taxable compensation for purposes of IRA contributions.

The W-2 box 1 wage income you receive from the same S-corp is taxable compensation for purposes of IRA contributions.

Re: K-1 plus W-2 - Determine Roth MAGI
Posted by: edh, October 26, 2008 04:00AM
wheniwork Wrote:
-------------------------------------------------------

>
> To me that sounds like my K-1 income that I
> receive as a shareholder is NOT qualifying income
> for Roth income limits. Am I missing something?

You're not really missing anything. But you are getting the tests mixed up.

Under current law, your K-1 is not earned income. If all you had is your K-1 (Sub S) income, you could not contribute to an IRA because your earned income is zero. This is what Kaye was saying in the article to which you refer.

I use the term "earned income" because, to me, it is easier to understand in most situations. Kaye uses the term "qualifying income" because it is broader. For example, taxable alimony is not really "earned income," but Congress has said that it is just like earned income when it comes to contributing to an IRA. Therefore, qualifying income includes taxable alimony. There's a little more to it than that, but that takes care of the basics.

In short, you have to have qualifying (to use Kaye's term) income to contribute to an IRA. The wages shown on your W-2 are qualifying income for this purpose; your K-1 income is not.

That's the first test: Your contribution is limited to the amount of qualifying (or earned) income you have. (Actually, it's limited to the lesser of $5000 (if you are under age 50) or the amount of qualifying income.)
=======

Next there is the second test. Your allowable IRA contribution is limited or eliminated if your "modified adjusted gross income" is within or above the phase out range for your filing status. For a single individual, a full Roth contribution is allowed for 2008 if your MAGI is 101,000 or less, a partial (i.e., less than $5000) contribution is allowed if your MAGI is between $101,000 and $116,000; and no Roth contribution above $116,000.
Your MAGI includes both your wages and your K-1 income (plus any other income you have like interst, capital gains, gambling winnings, etc.). The term qualifying income is not used at all in talking about the second test. It is used in discussing the first test only. Your K-1 income is fully included in your MAGI.

BTW, adjusted gross income (AGI) is the bottom amount on page 1 of your 1040. As mentioned, MAGI is the AGI with various modifications. K-1 income is not one of those modifications.
For more information, you may want to look at page 60 in IRS Pub 590.

[www.irs.gov]

Also, Kay talks about MAGI (for the second test) here:

[www.fairmark.com]

[www.fairmark.com]



Sorry, only registered users may post in this forum.