IRA with other pension

[GregLee]

As usual, I'm late starting to figure my federal tax bill for 2010, and I ran up against something unexpected. There is some sort of limitation on IRA contributions if you have also a retirement plan at work. I've had a retirement plan at work for 39 years, and I've been putting money into IRAs for a long time, too. Now, I'm not sure those IRA contributions were legitimate, and I'm not sure what I should do for this year. Does anyone understand this? In the instructions for form 1040A, page 26, it says for lines 14a and 14b (Social Security Benefits), "Exception. ... You made contributions to a traditional IRA for 2010 and you or your spouse were covered by a retirement plan at work." And it refers to Pub. 590, which for me, seems to imply that I just can't take the IRA deduction this year, and maybe I shouldn't have in previous years, either.

 

[Sandhog]

As far as I know, Roth IRA have income restriction but no restriction due to being on the pension plan. Also, 401K is also offering Roth 401k.

The 2010 IRA contribution limits are unchanged. Since 2008, the limit you may contribute to a regular IRA has been $5,000. However, if you will be 50 or older by the end of the year, you can contribute an extra $1,000, for a $6,000 total contribution limit.
These limits apply to both regular and Roth IRAs. Although you may be eligible to contribute to both plans, your combined contribution to both accounts cannot exceed your above limit ($5,000 or $6,000).
2010 Deductible IRA Contribution Limits

Although there is no maximum income restriction for contributing to a regular IRA, there are limits to deducting regular IRA contributions.
2010 Roth IRA Income Limits

There are maximum income limits for Roth IRA contributions. During 2010, married individuals who file jointly can contribute $5,000 ($6,000 if 50 or older) to a Roth IRA only if their modified adjusted gross income (MAGI) is below $167,000. If their MAGI is between $167,000 and $177,000, then they can contribute some amount less than their full limit. If their income exceeds $177,000, they are not eligible to contribute to a Roth IRA for 2010. These numbers increased by $1,000 from 2009. In 2008, this phase-out range was $159,000 to $169,000.

 

[Alan]

As usual, I'm late starting to figure my federal tax bill for 2010, and I ran up against something unexpected. There is some sort of limitation on IRA contributions if you have also a retirement plan at work. I've had a retirement plan at work for 39 years, and I've been putting money into IRAs for a long time, too. Now, I'm not sure those IRA contributions were legitimate, and I'm not sure what I should do for this year. Does anyone understand this? In the instructions for form 1040A, page 26, it says for lines 14a and 14b (Social Security Benefits), "Exception. ... You made contributions to a traditional IRA for 2010 and you or your spouse were covered by a retirement plan at work." And it refers to Pub. 590, which for me, seems to imply that I just can't take the IRA deduction this year, and maybe I shouldn't have in previous years, either.

If you or your spouse are covered by a retirement plan at work then the deductible portion of your IRA is limited. For married filing jointly you look at your modified adjusted gross income and compare it against the table in pub 590.

The deduction phase out begins at MAGI $167k and is gone completely at $177k.

Your tax software should take care of all of this for you, and each year will file form 8606 with your return to keep track of your cost basis. (If you have always done fully deductible contributions then your cost basis is zero).

Summary
Regardless of income you can make IRA contributions if you have earned income. The salary limitation if you are covered by a pension plan sets the limits of how much of the contribution can be tax deductible.

 

[kaneohe]

I agree w/Alan. However, pls note that there are 2 tables if you are married.....one for the spouse w/ retirement plan and one for the spouse without (assuming you have a spouse and that only one has a retirement plan).
Looks to me that the spouse w/ retirement plan has income limits of 89-109K
while spouse w/o plan has income limits of 167-177K. Above max limit, nothing is deductible. Below min limit, everything is deductible. In between is a phaseout region (linear, I believe).

Ever wonder what that box on the W2 was for......where it says retirement plan
and the box is checked?

2010 IRA Contribution and Deduction Limits

 

[rescueme]

Ever wonder what that box on the W2 was for......where it says retirement plan
and the box is checked?

Well, for one thing, it will check your IRA basis (e.g. vs. current form 8088 basis) to see if you can get current year credit for taxes previously paid in a non-deductable TIRA (something from the long past, in our case).

DW is still employed. I, of course, am not. While we could have received some decent refunds based upon our previous taxable TIRA's, with DW still employed, we turn off that checkbox in the tax software, even though it is on her W2 and my 1099 (for TIRA withdrawals).

We prefer not to get that "return of extra taxes" at this time. When we both are retired, we'll use it to further plan our portfolio withdrawals, and taxes due. I do that now; DW doesn’t have that "planning option" since she's still has a W2 - with no control over taxes paid.

Of course, it would be different if we really needed that refund, but we're fortunate to be able to just defer it till the future, when we can control our taxes paid during the year, and at possible higher rates.

 

[GregLee]

The deduction phase out begins at MAGI $167k and is gone completely at $177k.

I had seen figures like this before and had just been assuming that since my income was substantially below 167k, I would be unaffected. Unfortunately, since my wife and I were both covered by retirement plans at work, the phase out for a joint return is 89k to 109k, if I'm interpreting the form right. And a large SS payment puts us just over the line. So no IRA deduction for me. Ouch.

 

[Alan]

I had seen figures like this before and had just been assuming that since my income was substantially below 167k, I would be unaffected. Unfortunately, since my wife and I were both covered by retirement plans at work, the phase out for a joint return is 89k to 109k, if I'm interpreting the form right. And a large SS payment puts us just over the line. So no IRA deduction for me. Ouch.

If you are not going to get a deduction you may as well contribute to a Roth instead, then the earnings will be free from tax going forward, unlike a non-deductible IRA.

 

[GregLee]

If you are not going to get a deduction you may as well contribute to a Roth instead, then the earnings will be free from tax going forward, unlike a non-deductible IRA.

Good idea. Thanks.

 

[Alan]

If you are not going to get a deduction you may as well contribute to a Roth instead, then the earnings will be free from tax going forward, unlike a non-deductible IRA.

Good idea. Thanks.

Just remembered - Roth's have contribution limits as well, so you need to check those limits OR simply make your non-deductible IRA contribution then convert it to a Roth, which is an extremely simple transaction.

 

[Mulligan]

Good idea. Thanks.

GregLee- If I was you, I would seriously consider trying to squeeze as much Roth money as you can from here on out. I have a pension and am drawing it. But, I'm still working enough to fully fund a Roth. I want to build a tax free revenue stream, as you know, they tax those pensions fully as income but without the tax shelters to hide any of it. This would give you a separate revenue stream that the government can't tax you on down the road (unless of curse they change the rules of the game).

 

[GregLee]

GregLee- If I was you, I would seriously consider trying to squeeze as much Roth money as you can from here on out. I have a pension and am drawing it.

Yes, but there's not much "here on out" for me, since I retired last summer. My earned income days are over.

 

[lemming]

I was always under the income limits for making a IRA or Roth contribution so I funded my Roth each year. I was always under $55,000 gross.
Could you clear up a question on MAGI? Assume only salary not other income for simplicity. Gross wages 70k 401k=15k MAGI $55,000?
Meaning do you subtract your 401k contributions from income to determine your IRA eligibility? And would that help Greglee?

 

[Alan]

I was always under the income limits for making a IRA or Roth contribution so I funded my Roth each year. I was always under $55,000 gross.
Could you clear up a question on MAGI? Assume only salary not other income for simplicity. Gross wages 70k 401k=15k MAGI $55,000?
Meaning do you subtract your 401k contributions from income to determine your IRA eligibility? And would that help Greglee?

Correct. Line 38 is your Adjusted Gross Income which already has 401k distributions taken off. (If you look at your W-2 you'll see that the income you report on your taxes is after 401k contributions).

the MAGI has a few other adjustments. (see table 1-1)