Wondering how you enter retirement contributions in Scenario Analysis? Here's how it works!
In this article, we'll be discussing employee salary deferrals to a 401(k) and contributions to an IRA. If you are looking for guidance on how to enter contributions to self-employed retirement plans such as a Solo 401(k), SEP IRA, or SIMPLE IRA, you can find those answers in our article on that topic below.
Where Do I Enter Contributions to Retirement Plans for Self-Employed Individuals?
401(k) Contributions:
Employee salary deferrals to a 401(k) that are pre-tax, will generally by their nature not be included in the tax calculation, as they are not included in wages subject to income taxation that show up on line 1a of Form 1040. Therefore, pre-tax 401(k) contributions can be modeled in Holistiplan by adjusting the amount of pre-tax savings deferrals in the wages worksheet in Holistiplan. %20salary%20deferrals.jpg?width=581&height=498&name=Wages%20Worksheet%20for%20401(k)%20salary%20deferrals.jpg)
Let's look at an example of how this would work in practice below for Peter and Paula Professor. If Peter increases his annual pre-tax 401(k) salary deferral by $5,000, you would account for that by entering $5,000 in the Pre-tax Savings Deferral Field, as illustrated below:
That $64,000 combined with Paula's taxable wages of $60,000, results in a total of $124,000 of taxable wages used in income tax calculations for Peter and Paula's return.
Even though that $5,000 contribution reduces income subject to income taxation, however, pre-tax contributions to a 401(k) are still included in Medicare wages and are subject to payroll (FICA) taxes. If you need a helpful guide on making entries in the Wages Worksheet and what income on a W-2 is subject to which taxes, check out our article here.
Holistiplan does not generally calculate FICA (payroll) taxes, because they usually do not show up on the tax return, with two exceptions - Additional Medicare Taxes (Form 8959) and SE Tax (Schedule SE). Though it does not impact Peter and Paula here, because as MFJ filers, their wages are under the $250,000 threshold, as a best practice you will want to make sure that your Medicare Wages number is accurate in case Additional Medicare Taxes apply in your scenario.
By default, Holistiplan assumes that the amount of taxable wages is equal to the amount of Medicare Wages field , unless/until those Medicare Wages are adjusted in the override field.
IRA Contributions:
Roth IRA contributions or non-deductible IRA contributions do not need to be entered in Holistiplan, since they do not have an impact on the income tax calculation. Non-deductible IRA contributions that are then converted may include basis, and to the extent any IRA conversions are not taxable due to that basis, such non-taxable IRA distributions do not need to be entered in Holistiplan either. You may wish to use our Field Notes feature to remind yourself why items that do not income taxes are not included in Scenario Analysis.
If the client's IRA contribution is tax deductible, you can enter the amount of the deduction allowed on the "IRA Deduction" within the "Schedule 1 Deductions (Above the Line)" where outlined in blue below. Guidance from the IRS can be found here about the rules around deductibility of IRA contributions.
Note: There are guardrails on this IRA Deduction entry to a certain extent, but the amount of the allowable IRA deduction is not calculated within Holistiplan. If an IRA deduction is entered above the statutory maximum annual IRA contribution limits, a warning will appear, but you will need to calculate and confirm the eligible deduction for your client's IRA contribution.
If you have any questions along the way as you model these retirement plan contributions out within Holistiplan, please Contact our Support Team for further assistance!