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Say, someone over 18, a college student, earn a total of $5000 (W2 Wages, tips, other compensation) from a summer job. And pay:

  • $500 social security / medicare tax
  • $800 federal income tax
  • $200 state income tax

Is the person allowed to contribute $5000 to a Roth IRA or would that be reduced by any of these taxes paid?

2 Answers 2

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Say, someone over 18, a college student, earn a total of $5000 (W2 Wages, tips, other compensation) from a summer job. And pay:

  • $500 social security / medicare tax
  • $800 federal income tax
  • $200 state income tax

Is the person allowed to contribute $5000 to a Roth IRA or would that be reduced by any of these taxes paid?

The good news is that you can contribute up to your earned income or up to a $6,500 maximum if your earned income is higher.

But how do you do so if the $1,000 is in the hands of the IRS and the state tax authority, and $500 was sent in for social security and Medicare?

If a person has income that low they are likely to have zero tax liability.

The good news is that most or all of the $1,000 will be coming back as refund when you file your tax returns. That is because the employer was withholding taxes based on the information on the state and federal W-4 forms; and the tax tables assume that you will be employed at your typical rate for the entire year.

If you get get that return in quickly, the refund can be in your bank account long before the deadline for making a Roth or traditional IRA contribution by the 15 April deadline.

Next summer have a look at claiming you are exempt on the federal W-4:

Exemption from withholding

If an employee qualifies, he or she can also use Form W-4 to tell you not to deduct any federal income tax from his or her wages. To qualify for this exempt status, the employee must have had no tax liability for the previous year and must expect to have no tax liability for the current year. A Form W-4 claiming exemption from withholding is valid for only the calendar year in which it's furnished to the employer. To continue to be exempt from withholding in the next year, an employee must give you a new Form W-4 claiming exempt status by February 15 of that year. This date is delayed until the next business day if it falls on a Saturday, Sunday, or legal holiday. If the employee doesn't give you a new Form W-4 by February 15, withhold tax as if he or she is single or married filing separately with no other entries in step 2, 3, or 4. If the employee provides a new Form W-4 claiming exemption from withholding on February 16 or later, you may apply it to future wages but don’t refund any taxes withheld while the exempt status wasn’t in place.

There may be a similar exemption on your state version of the W-4.

Note: You can't get a refund of the social security and Medicare withholding, though in reality it wouldn't have been 10% of your gross pay. It is 7.65%.

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  • Might be worth addressing the chicken-and-egg problem (especially for Trad IRA), where the refund doesn't come until after the return is filed, and IRA contributions are listed on the return. I see a few options, including filing based on the intended contribution or filing an amended return, but not sure which is advisable for people in OP's situation. (Of course for OP with zero income tax, there's no reason to take the Trad IRA deduction, Roth is definitely the way to go)
    – Ben Voigt
    Commented Mar 11 at 15:18
  • With that low income you can fill a W4 for zero witholdings and have none withheld in the first place. Check the box that reads something like [X] Exempt. I had all of my witholdings returned last year and expect all my witholdings to be returned this year.
    – Joshua
    Commented Mar 11 at 18:33
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    "you can contribute up to your earned income... But how do you do so if the $1,000 is in the hands of the IRS..." -- even if taxes weren't refunded, money could be contributed from other sources such as prior savings or gifts.
    – nanoman
    Commented Mar 11 at 21:51
  • @mhoran_psprep, perhaps I should have been explicit about the assumption that the person has enough savings to contribute whatever the highest amount possible. I was more concerned about what is the upper limit imposed by the regulations in the example. It seems it is $5000. Good info on tax exceptions, would be useful for someone without extra funds.
    – Aelian
    Commented Mar 12 at 6:11
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No, it won't be reduced by taxes. You can contribute up to $6500/year of earned income (i.e.: salary or self-employment income). If your total earned income is $5000 - then that's your limit. If you're contributing to Roth, it's after-tax, i.e.: you don't get tax benefit. So you can contribute the $5K, but if you paid taxes from this amount and don't have any other money to replace it - then sucks, you'll contribute what you've got left.

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