Does earned income include 401k contributions for IRA contribution limits?

This is actually a really good question that trips up a lot of people! The simple answer is YES - your earned income DOES include your 401k contributions for IRA contribution purposes. When you contribute to a traditional 401k, that money is still considered part of your earned income even though it's pre-tax. So in your example, the person with $28,000 salary who puts $25,000 into their 401k would still have $28,000 in earned income for IRA contribution limits. This means they could contribute up to the full annual IRA limit (currently $7,000 if under 50), not just the $3,000 left after the 401k contribution. The IRS looks at your gross earned income before any retirement plan deductions to determine your IRA contribution limit. Just remember there are income limits for deducting traditional IRA contributions if you have a workplace retirement plan, and for contributing to Roth IRAs based on modified adjusted gross income.

I struggled with exactly this situation last year and discovered taxr.ai (https://taxr.ai) which saved me from making a big mistake. I was about to limit my IRA contribution based on my post-401k income when their analysis showed me I could contribute the full amount. Their AI tax assistant analyzed my situation and explained that 401k contributions don't reduce the "earned income" threshold for IRA contribution purposes. It also gave me a breakdown of how my 401k contributions affected different parts of my tax situation - like eligibility for Roth contributions, tax bracket changes, and other retirement account interactions. I found it super helpful because it could interpret all the confusing IRS language and translate it into actual impacts on my specific situation.

Just wanted to follow up and say I checked out taxr.ai after seeing it mentioned here. It was exactly what I needed for my situation with mixed W-2 and self-employment income! I uploaded my previous tax return and it immediately identified that I had been calculating my retirement contribution limits incorrectly. Turns out I could have contributed about $4,500 more to tax-advantaged accounts last year than I thought. It showed me the exact IRS rules and how they applied to my specific situation. The explanations were super clear and it even provided a strategy for how to allocate between my Solo 401k and IRAs this year to maximize tax benefits. Thanks for the recommendation!

If you're having trouble getting clear answers from the IRS about retirement contribution rules, I'd recommend trying Claimyr (https://claimyr.com). I spent hours on hold trying to get clarification about exactly this 401k/IRA interaction issue last tax season. With Claimyr, I got through to an actual IRS agent in about 15 minutes instead of waiting for hours. They have this callback system that basically waits on hold for you until an agent is available, then calls you. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed what others here are saying - 401k contributions don't reduce your earned income for IRA contribution purposes. Getting that official confirmation directly from the IRS gave me peace of mind to max out both accounts.

I need to eat my words about being skeptical of Claimyr. I tried it yesterday after posting my doubtful comment, and I'm honestly shocked. After trying to reach the IRS for THREE WEEKS about a complex retirement account question, I got connected to an agent in under 20 minutes using their service. The IRS agent was able to confirm everything about the 401k/IRA earned income question and also helped me with a separate issue about an excess contribution I made last year. I was able to get both problems solved in one call instead of continuing to stress about it. I've literally never been able to reach the IRS before despite multiple attempts, so this was kind of life-changing for my tax anxiety. Just wanted to share since I was the skeptic before!

Just to add another data point here: my tax situation last year involved exactly this scenario. I made about $32,000 and contributed $25,000 to my 401k. My tax advisor confirmed that I could still contribute the full $7,000 to my Roth IRA because my earned income was still $32,000 for IRA purposes. The W-2 box 1 showed a much smaller amount (around $7,000) because of the 401k contribution, but that reduced amount is NOT what determines your IRA contribution limit. One thing to watch out for though - if you're trying to qualify for a Roth IRA and you're near the income limits, traditional 401k contributions help lower your MAGI, which might keep you eligible.

This earned income vs. 401k thing confused me so much I ended up paying a penalty last year! I thought my "earned income" was only what was left after 401k contributions, so I contributed too much to my IRA. Does anyone know if there's a way to see your true "earned income" amount on your W-2 or somewhere else? Is it just Box 1 or is it some other number?

This is such a common misconception that causes a lot of unnecessary stress! I see several people have already given great explanations, but I wanted to add my perspective as someone who works in retirement plan administration. The key thing to remember is that the IRS uses different definitions of "income" for different purposes. For IRA contribution limits, they look at your total earned income BEFORE any retirement plan deferrals. So yes, in your example, the person would have $28,000 in earned income for IRA purposes and could contribute up to $7,000 to an IRA. What I find helpful is to think of it this way: your 401k contribution is just redirecting part of your paycheck to a retirement account, but you still "earned" that full amount through your work. The IRS wants to encourage retirement savings, so they don't penalize you by reducing your IRA contribution room just because you're already saving in a 401k. One practical tip: if you're ever unsure about your specific situation, Publication 590-A from the IRS has all the detailed rules about IRA contributions and earned income definitions. It's dense reading, but it's the authoritative source!

This thread has been incredibly helpful! I was in almost the exact same situation as the original poster - making around $30k and maxing out my 401k, then getting confused about IRA limits. What really clicked for me reading through these responses is the distinction between "earned income" (which includes your 401k contributions) and "taxable wages" (Box 1 on your W-2, which doesn't). I had been looking at Box 1 and thinking that was my limit for IRA contributions. It's also reassuring to see multiple people confirm this with actual experience and even official IRS confirmation. The tax code can be so confusing, especially when you're trying to optimize multiple retirement accounts at once. Thanks to everyone who shared their knowledge and resources - this community is awesome for getting reliable tax advice!

This is exactly the kind of question that shows how unnecessarily complex the tax code can be! I went through this same confusion when I started maximizing both my 401k and IRA contributions. To add to all the great explanations here: think of it this way - your employer reports your full gross wages to the Social Security Administration and for Medicare purposes regardless of your 401k contributions. That's the same income base the IRS uses for determining IRA contribution eligibility. One thing I didn't see mentioned is that this rule also applies to other pre-tax deductions like health insurance premiums, HSA contributions, and flexible spending accounts. None of these reduce your "earned income" for IRA purposes, even though they all reduce your taxable wages in Box 1 of your W-2. The IRS basically wants to make sure you can't game the system by loading up on pre-tax deductions to artificially lower your earned income and then claim you can't contribute to retirement accounts. It's actually designed to help savers, not hurt them!