If someone didn’t have personal expenses or had a non-taxable income source that covers their costs, could they put all their earned wages into tax-deferred investments? And how would this affect their taxes, eligibility for tax credits, etc.?
For example, if you’re married and filing jointly with a household income of 50k, each person can contribute up to 23k to a 401k and 7k to a traditional IRA. Your family could also contribute 8.3k to an HSA account. You could wipe out your AGI if you can afford it. The only thing you can’t avoid is FICA taxes.
Val said:
@Jai
Just a heads-up, you don’t have to be married or file jointly to do this.
You’re right, my bad.
@Jai
Thanks for clearing that up! If AGI is near $0, would you still qualify for the child tax credit or earned income tax credit even if your gross income is higher than the usual limits?
Sophia_2 said:
@Jai
Thanks for clearing that up! If AGI is near $0, would you still qualify for the child tax credit or earned income tax credit even if your gross income is higher than the usual limits?
Yeah, those credits look at your AGI, not gross income. So if you made 60k and contributed 20k pre-tax, and the limit for the credit is 50k, you’d still get it.
Sophia_2 said:
@Jai
Thanks for clearing that up! If AGI is near $0, would you still qualify for the child tax credit or earned income tax credit even if your gross income is higher than the usual limits?
The EIC is based on your W-2 earnings, so 401k and HSA contributions wouldn’t count, but IRA contributions would.
Ren said:
@Jai
I don’t think you can contribute to a traditional IRA if you’re also contributing to a 401k.
You can. There’s a phase-out for deductions if your Modified AGI is above certain levels, but this post is about reducing AGI to zero.
Ren said:
@Jai
I don’t think you can contribute to a traditional IRA if you’re also contributing to a 401k.
You can contribute to both a 401k and a traditional IRA if your income is under certain limits. If you earn more, you can still contribute to a non-deductible IRA. There are also limits for Roth IRA contributions.
Val said:
@Zephyr
Exactly, anyone can contribute to a traditional IRA, but deductions have income limits.
Thanks for pointing that out. I’ll edit my post to clarify the deduction limits for traditional IRAs.
@Zephyr
I believe the Roth and traditional IRA limits are combined. So if you contribute $7k in total, it’s split between both types.
Parker said:
@Zephyr
I believe the Roth and traditional IRA limits are combined. So if you contribute $7k in total, it’s split between both types.
That’s correct. For Roth IRAs, the contribution limits are based on your income level. If your income is too high, people often use a ‘backdoor Roth’ strategy.
Ren said:
@Jai
I don’t think you can contribute to a traditional IRA if you’re also contributing to a 401k.
That’s not quite right.
Years ago, I had my full pay from a side job sent to an HSA because HSA contributions are exempt from FICA taxes. The 2024 limits for HSA contributions are $4,150 for single coverage and $8,300 for family. But it’s much easier to get your AGI to $0 if you’re earning less in the first place. If you’re older and make a lot of money, consider looking into DCGAs (deferred charitable gift annuities). They allow you to make donations now and defer the payments.
Shawarmadude’s post was pretty spot on, so I won’t repeat the details. But just to add, the figures are more like $69,000 for Married Filing Jointly (MFJ) and $35,000 for single filers if you max out what Shawarmadude mentioned. Not all employers will let you contribute 100% of your pay to a 401k, even though the IRS allows it. There are other ways, like student loan interest deductions or educator expenses, that can lower your AGI even further.
@Zephyr
I agree with you there. A $0 AGI won’t help you qualify for some non-refundable credits. With a $0 AGI, you won’t get things like the Child Tax Credit or the American Opportunity Credit, since only the refundable portions would apply. Other credits like EIC or Childcare Credits also won’t apply. If you’re asking this out of curiosity, it’s not a goal I’d recommend aiming for. Contributing all your income to your 401k just to get your AGI to $0 might not be the best idea.
@Val
I’ve worked in tax for a while, and while it may be tempting to aim for a $0 AGI, you might be better off just contributing to Roth accounts if you’re in the 0% tax bracket. When you withdraw, it could be taxed later.
@Zephyr
Exactly. It’s better to take a non-zero AGI and contribute to a Roth IRA or Roth 401(k) instead.