Author Topic: Don't understand limits on contributions to IRA's and 401K's...Tax ???  (Read 5142 times)

kolorado

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This is the first year we've been in this situation as lower income earners. Our family moved across the country last April and was given a lump sum from hubby's company to do so. At the time we asked if this would be considered taxable income and no one could give us an answer. It never showed up in our paycheck records but it did show up on our W-2. Since this was a payment of $15K it has substantially increased our gross income to the point where we will not qualify for any credits this year. We can't take a large moving deduction on our taxes to account for this because the company paid the bill for the movers. There was actually a big brou-ha-ha about this that lasted until July. Our paperwork said they'd pay for our move and give us a moving bonus but when they got the bill from the movers they claimed they paid twice to move us and wanted "their" money back. With our paperwork in hand they backed down but $6K in federal taxes paid and $2K in state tax paid appeared on the next paycheck. There was no corresponding income on the income side to account for this.??? The $15K never appeared on a check.  My husband has been trying to get answers to this for months with no luck. The plant has one Human Resources worker who works from home 95% of the time. :/
Logically I should have figured that this would be considered in our income, but since it never showed up in our running income on checks, I somewhat expected they would demand the money back later. If I had shifted some savings money to reduce our income to retirement accounts and they later somehow legally demanded money back, our savings would have dropped uncomfortably low. I really should have done that though. Whoops.
Anyway, since we have money sitting in savings and would like to shift it into retirement accounts anyway, can we do this and reduce our income now for 2012 filing? I can't seem to find clear-cut info about putting a lump sum into 401K or how much I can put in an IRA instead. Some advice seem to suggest the limits are for a combination of the two types of accounts and not for each. It is so confusing.
We are a married couple filing jointly if that helps. TIA for all advice!

bo_knows

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Re: Don't understand limits on contributions to IRA's and 401K's...Tax ???
« Reply #1 on: February 04, 2013, 07:22:53 AM »
If you do not have a Traditional IRA account, you have until tax-day to contribute toward your 2012 numbers. The limit for 2012 is $5000 each person (which I believe is either Roth or Traditional, the total of the two. So you can't contribute $5k to Roth (each) and $5k to traditional).

Contributing to a Traditional IRA will decrease your taxable income.

sherr

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Re: Don't understand limits on contributions to IRA's and 401K's...Tax ???
« Reply #2 on: February 04, 2013, 07:48:53 AM »
I believe anything given to you of significant value counts as taxable income, so I believe that the company taking taxes out of your check for the moving expenses is legitimate. I'm not sure though, so you may want to explain your situation to a tax professional and see what they say.

As far as 401k and IRAs go I should be able to be more helpful. 401ks are investment accounts that are provided through your employer, so your employer sets some rules that may be different from other 401k accounts. Usually though the only way to contribute to a 401k is to have them deduct money from your pay check; I have never heard of a 401k that lets you invest money from your savings and certainly not after the year is over. The contribution limit for 401ks last year was $17,000.

IRAs are different in that they are managed by you the individual, hence the Individual Retirement Account. You can set up any number of IRAs of any mixture of the types (Traditional and Roth are the two types of IRAs), but the total contribution that you can make between all of them was $5,000 in 1012 ($6,000 if you're over 50). Note that these are *Individual* retirement accounts, not joint or family, so that limit is a per-person limit. You as an individual must have made at least as much income as you put into an IRA for a given year, but if both you and your husband worked last year (and both made over $5,000) then you can both contribute $5,000 to your IRAs for a total of $10,000. You can make contributions to an IRA and count it as if it was made last year any time before April 15th. The company you set up your IRA through (I recommend Vanguard) will have an option for whether you want your contribution to count towards 2012 or 2013 when you contribute money. The limits on 401ks and IRAs are different and to not interact in any way.

Of the two types of IRAs, only Traditional IRAs would reduce your tax liability for a given year. In Traditional IRAs you contribute pre-tax money and then it is taxed when you withdraw it in retirement. So any money you contribute to a Traditional IRA you will subtract from your income before you calculate the amount of taxes owed. In a Roth IRA you contribute after-tax money, but then you owe no more taxes in retirement. (And in a regular investment account you contribute after-tax money *and* you will owe taxes on capital gains when you withdraw. IRAs essentially let you choose one or the other instead of both.) Traditional and Roth IRAs are mathematically equivalent if your tax rate now is the same as your tax rate in retirement. If your tax rate is less in retirement then Traditional is better, if it's more in retirement then a Roth is better. Most people will have a lower tax rate in retirement. You can contribute to both if you want to, but the total you contribute is what is limited and only contributions to the Traditional will reduce your current taxes.

To hopefully make this more clear let's do an example. Let's say that both you and your husband worked last year and each of you earned at least $5,000. You decide you want to invest in a Traditional IRA exclusively to reduce the number of taxes you will pay, so you open a Traditional IRA with Vanguard and contribute $5,000 (last year's max) to your account, marking the option that it should count as a 2012 contribution as you do so. Your husband decides he wants to hedge his bets because maybe tax rates will be higher in the future, so he opens both a Traditional IRA and a Roth IRA and contributes $2,500 to each of them (also reaching the limit), also earmarking the contributions as having been made in 2012. Your family can then deduct $7,500 from your income when doing your taxes. All of this is irrespective of and unrelated to anything else you might have done with a 401k.

Hopefully that is slightly more clear than mud, but don't feel bad if it's not. This stuff is pretty complicated.

mlipps

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Re: Don't understand limits on contributions to IRA's and 401K's...Tax ???
« Reply #3 on: February 04, 2013, 08:50:44 AM »
Note that the income limit for a Traditional IRA being deductible is:
"Married taxpayers filing jointly (and qualified widows and widowers) can take the full deduction up to a modified adjusted gross income to to $95,000. The deduction phases out through $115,000."
Unless you're not covered by a retirement plan at work, then it's much higher.

Jamesqf

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Re: Don't understand limits on contributions to IRA's and 401K's...Tax ???
« Reply #4 on: February 04, 2013, 11:14:19 AM »
I'm not an expert, but from my own experience, if the company gave you a lump sum as moving expenses, that counts as taxable income, but you can then deduct whatever your actual moving expenses were.

sheepstache

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Re: Don't understand limits on contributions to IRA's and 401K's...Tax ???
« Reply #5 on: February 04, 2013, 12:42:24 PM »
This is the first year we've been in this situation as lower income earners. Our family moved across the country last April and was given a lump sum from hubby's company to do so. At the time we asked if this would be considered taxable income and no one could give us an answer. It never showed up in our paycheck records but it did show up on our W-2. Since this was a payment of $15K it has substantially increased our gross income to the point where we will not qualify for any credits this year. We can't take a large moving deduction on our taxes to account for this because the company paid the bill for the movers. There was actually a big brou-ha-ha about this that lasted until July. Our paperwork said they'd pay for our move and give us a moving bonus but when they got the bill from the movers they claimed they paid twice to move us and wanted "their" money back. With our paperwork in hand they backed down but $6K in federal taxes paid and $2K in state tax paid appeared on the next paycheck. There was no corresponding income on the income side to account for this.??? The $15K never appeared on a check.  My husband has been trying to get answers to this for months with no luck. The plant has one Human Resources worker who works from home 95% of the time. :/
Logically I should have figured that this would be considered in our income, but since it never showed up in our running income on checks, I somewhat expected they would demand the money back later. If I had shifted some savings money to reduce our income to retirement accounts and they later somehow legally demanded money back, our savings would have dropped uncomfortably low. I really should have done that though. Whoops.
Anyway, since we have money sitting in savings and would like to shift it into retirement accounts anyway, can we do this and reduce our income now for 2012 filing? I can't seem to find clear-cut info about putting a lump sum into 401K or how much I can put in an IRA instead. Some advice seem to suggest the limits are for a combination of the two types of accounts and not for each. It is so confusing.
We are a married couple filing jointly if that helps. TIA for all advice!

Ouch.  Well your employers can pay the movers directly and take some sort of deduction themselves.  Or they can say they paid you the bonus and you then take on the full tax burden but also gain the right to deduct the moving expenses.  So even if you never saw that 15K, if it's being credited on your W2, you should be able to deduct the moving expenses no matter who paid the bill.  That's my take on it as a non-professional.  Sounds like you need to be sure of the numbers that were actually paid to you and make sure they match up with the HR department's first.  The good thing is you caught it now when you still have a couple months to sort it out before tax day.
I agree with others who have said you can't, as far as I know, make 2012 401K contributions on your own at this point but you could max out a traditional IRA, if your agi is under the limit, before tax day.  You would want to look into whether the traditional IRA is actually the option you most want and not just do it to avoid the painful pinch of unexpected taxes, of course.

kolorado

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Re: Don't understand limits on contributions to IRA's and 401K's...Tax ???
« Reply #6 on: February 06, 2013, 08:38:34 AM »
This was all so helpful. Thank you all so much, especially sherr! I think I understand it all now.
 Now we just have to get a line-by-line explanation for how the company figured the moving expenses/bonus/taxes paid in. I don't even know how much the moving company actually cost but I'm betting it was more than they gave us.
It looks like a Traditional IRA contribution at this point won't help us on taxes since only my husband worked and we need to reduce the income side by about $8K to qualify for credits. Unless we are able to deduct the the moving expenses the company paid. I don't know why we'd be able to do that if we didn't actually pay the bill. The way the tax paid in appeared on the check stubs had to mean that the company paid this in for us right? But we have no idea why they would do that or even if it really is related to the bonus. I'm just guessing that it is because of the timing.
Now I just need to nag my hubby daily to leave messages for the Human Resource worker until we get our answers.

mlipps

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Re: Don't understand limits on contributions to IRA's and 401K's...Tax ???
« Reply #7 on: February 06, 2013, 08:51:19 AM »
This was all so helpful. Thank you all so much, especially sherr! I think I understand it all now.
 Now we just have to get a line-by-line explanation for how the company figured the moving expenses/bonus/taxes paid in. I don't even know how much the moving company actually cost but I'm betting it was more than they gave us.
It looks like a Traditional IRA contribution at this point won't help us on taxes since only my husband worked and we need to reduce the income side by about $8K to qualify for credits. Unless we are able to deduct the the moving expenses the company paid. I don't know why we'd be able to do that if we didn't actually pay the bill. The way the tax paid in appeared on the check stubs had to mean that the company paid this in for us right? But we have no idea why they would do that or even if it really is related to the bonus. I'm just guessing that it is because of the timing.
Now I just need to nag my hubby daily to leave messages for the Human Resource worker until we get our answers.

You should still be able to contribute to a spousal IRA even if you didn't work, which would give you enough of a deduction.

Freedom2016

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Re: Don't understand limits on contributions to IRA's and 401K's...Tax ???
« Reply #8 on: February 06, 2013, 12:00:06 PM »
If I'm not mistaken, lump sum bonus payments may be subject to higher withholding than wages are. Googling it should turn up some useful information.

mlipps

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Re: Don't understand limits on contributions to IRA's and 401K's...Tax ???
« Reply #9 on: February 06, 2013, 12:45:46 PM »
If I'm not mistaken, lump sum bonus payments may be subject to higher withholding than wages are. Googling it should turn up some useful information.

It depends on how your company does payroll, but it will be taxed at a normal rate, even if it's withheld at a different one. if you can get past all the crazies at FatWallet, there's a good discussion of the details here:

http://www.fatwallet.com/forums/finance/1237127/

kolorado

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Re: Don't understand limits on contributions to IRA's and 401K's...Tax ???
« Reply #10 on: February 06, 2013, 01:14:30 PM »
I did not know about the higher rate on lump sum bonuses but it makes sense. Off to Google some more...

smalllife

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Re: Don't understand limits on contributions to IRA's and 401K's...Tax ???
« Reply #11 on: February 06, 2013, 07:52:05 PM »
Depending on how they do the payroll accounting, the income taxes may have been paid for you by the company on the moving expenses.  There are two types with different W-2 treatments, essentially fringe benefits (non cash but counted as income).  The IRS publications are really not scary - I would search there for moving reimbursements or benefits.

sheepstache

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Re: Don't understand limits on contributions to IRA's and 401K's...Tax ???
« Reply #12 on: February 13, 2013, 09:29:55 PM »
Unless we are able to deduct the the moving expenses the company paid. I don't know why we'd be able to do that if we didn't actually pay the bill. The way the tax paid in appeared on the check stubs had to mean that the company paid this in for us right?

I mean, my reasoning is that if the company paid the movers, they would take the tax deduction as having paid for an employee's relocation, but you're saying it looks like they also took taxes out of it as though they are claiming the _same_ money was paid out as employee income, which they can also deduct.  But they can't use the money twice.  They can't take both deductions.  That doesn't actually solve your problem, but figured I would clarify what I was trying to say.