How much income to include if I want to contribute to 457 + IRA?

[ryanf1475]

Hello, this year, I can exclude all of my income with the Foreign Earned Income Exclusion. However, I also want to contribute to my Roth 457 and Roth IRA. So, I believe that in order to do this, I cannot contribute more than my taxable income, which means that I would need to include at least 19K of income if that's what I'll contribute to the 457, but my question is whether I need to include an *additional* 6K if that's what I want to contribute to my Roth IRA? Thank you!

 

[FlyingRon]

There are all sorts of limits you are going to run up against, the 457(b), how much you earn, how old you are, whether you are married, and the extend of your foreign earned income exclusion all play into the Roth IRA contribution limits. See IRS PUB 590-A, Worksheet 2-1. It lays out how you calculate the maximum. https://www.irs.gov/publications/p590a#en_US_2018_publink1000230988

 

[ryanf1475]

There are all sorts of limits you are going to run up against, the 457(b), how much you earn, how old you are, whether you are married, and the extend of your foreign earned income exclusion all play into the Roth IRA contribution limits. See IRS PUB 590-A, Worksheet 2-1. It lays out how you calculate the maximum. https://www.irs.gov/publications/p590a#en_US_2018_publink1000230988

OK, thanks, but my question is not about how much I can contribute. It's about how much income I need to include (since I am eligible for the FEIE). Because if I am including only 19K of income but contributing a total of 25K to my 457 and IRA, then it's like I'm getting "double credit" for the 6K. Or, do I need to include 25K if that is what I'm contributing total?

 

[Taxing Matters]

Hello, this year, I can exclude all of my income with the Foreign Earned Income Exclusion. However, I also want to contribute to my Roth 457 and Roth IRA. So, I believe that in order to do this, I cannot contribute more than my taxable income, which means that I would need to include at least 19K of income if that's what I'll contribute to the 457, but my question is whether I need to include an *additional* 6K if that's what I want to contribute to my Roth IRA? Thank you!

You need to have enough earned income to cover the contributions you wish to make to both the 457 and the Roth IRA. So if you want to contribute $25k total between the two then you need to have at least $25k in earned income on your return that is NOT excluded by the FEIE.

There is also the separate issue of the modified adjusted gross income (MAGI) limits for contributions. You cannot reduce your adjusted gross income by the FEIE when determining the MAGI. See the IRS page on that here:
https://www.irs.gov/individuals/international-taxpayers/individual-retirement-arrangements

 

[ryanf1475]

You need to have enough earned income to cover the contributions you wish to make to both the 457 and the Roth IRA. So if you want to contribute $25k total between the two then you need to have at least $25k in earned income on your return that is NOT excluded by the FEIE.

There is also the separate issue of the modified adjusted gross income (MAGI) limits for contributions. You cannot reduce your adjusted gross income by the FEIE when determining the MAGI. See the IRS page on that here:
https://www.irs.gov/individuals/international-taxpayers/individual-retirement-arrangements

OK... so, if I were instead contributing to a traditional IRA, would I be able to (A) deduct the 6K that I include as taxable income, or (B) the rule is that I must actually pay taxes on an amount equal to or greater than what I contribute? (in which case I'd actually have to include 12K)

I think the answer is A? In which case my options are (A) and (C) below?

In the case of (A), taxpayer pays taxes later in exchange for tax-free income and growth.
In the case of (B), taxpayer pays taxes now AND later in exchange for tax free growth. (this seems not very smart)
In the case of (C), taxpayer chooses Roth IRA instead and pays taxes now in exchange for tax free growth and distributions later.

 

[Taxing Matters]

OK... so, if I were instead contributing to a traditional IRA, would I be able to (A) deduct the 6K that I include as taxable income....

Yes, assuming that some limitation does not apply to you. And yes, the trade off between a traditional IRA and a Roth is that with the former you get to deduct the amount of the contribution but you include all the distributions you get later in your taxable income and with the latter you do not get any tax deduction for the contribution but then the later distributions are tax free.