Tax Strategies

Hey, any CPA types out there:

My youngest child, who is in college, got a parttime job that offers a 401(k). She'll likely earn around $5,000 from it this year. I have her set up to contribute 50% of her earnings to the 401(k) Roth option. I intend to also match her earnings with a contribution to her Roth IRA. This little voice in the back of my head says that the IRS might not like the same earned income forming the basis of both types of contributions. That is, assuming she makes $5,000 this year, her total Roth contributions will be $7,500 between the IRA and 401(k). 

I have been unable to find anything in the Internal Revenue Code, applicable regulations, or IRS publications that would prohibit what I'm proposing. Roth IRA contributions are based on gross earnings, and I have found nothing that reduces those gross earnings because of 401(k) contributions.

Am I missing something? Any relevant thoughts would be appreciated.

@Rob Adams

Not a CPA, but Financial Advisor for 10+ years and you are exactly correct, the maximum Roth contributions cannot exceed her earned income. Let me suggest a better path and something I am doing for my grandchildren.  They put their earnings in the traditional 401k which may or may not be matched by employer and you match her earnings in the Roth IRA. Actually, works out better as some tax may be avoided on her earnings, either by you or her, depending on the situation.

Thank you, Dave. She actually gets a tiny employer match that will go into a traditional 401k, but I doubt she'll be there long enough for it to vest, since she graduates next May. She doesn't make enough yet for a tax deduction to do her any good, so the Roth option on her 401k seems best for now. She should be quite wealthy by the time she's my age, so in the long run, those Roth assets will be most beneficial to her.

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Rob Adams
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