Q. I am planning on retiring early next year. I don’t need my salary so for 2021 I plan to have my employer deposit my entire check into my traditional 401(k) but they will still withhold taxes. I estimate that I’ll earn $30,000 and $3,000 will be withheld for taxes. Can I still make the maximum $7,000 contribution to my 2021 Roth IRA?
— Still working
A. Congratulations on your retirement.
Given your cash flow, it’s great to be thinking ahead to how you can maximize your savings in the short period of time you will be earning a salary.
In terms of IRA contributions, when it comes to wages and your ability to contribute to an IRA, it’s the amount that shows up in Box 1 of your Form W-2 that matters, said Joseph Sarnecki, a certified financial planner with U.S. Financial Services in Fairfield.
He said it’s important to note this amount is reduced by any pre-tax traditional 401(k) contributions that you make at work.
Therefore, if your numbers are accurate, you would only be able to contribute $3,000, Sarnecki said.
“One option you may want to consider is funding your contributions into the Roth 401(k) if available within the plan,” Sarnecki said. “Roth contributions do not reduce the amount in Box 1, so by utilizing this, you would be able to max out your IRA.”
He said you wouldn’t receive a tax deduction for Roth contributions so this could impact your overall tax liability.
Before you make any moves, you should talk it over with a tax advisor who knows your entire financial situation.
Email your questions to Ask@NJMoneyHelp.com.
Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.