Traditional IRA contributions

[SouthBayAdvisor]

Wasn't sure where to post this but here it is.

I've asked different CPA's/accountants and I've received different answers. Couldn't get a clear answer on IRS Pub 590 either.

If a client is contributing to a 401K, makes around circa $130K (can't qualify for Roth), is he able to contribute to a Traditional IRA? I understand there are phase-out limits to be able to deduct contributions, but it's my understanding anyone can contribute to a non-deductible traditional IRA regardless of income and if they are contributing to something like a 401k.

Can anyone confirm? Thanks!

[Lucullus]

Your understanding is correct.

A lot of folks misunderstand this issue because they confuse deduction limits with contribution limits.


IRS Pub 590: "Can an individual contribute to a traditional IRA if he or she has other retirement plans?
Yes, individuals can contribute to a traditional IRA whether or not they are covered by another retirement plan. However, they may not be able to deduct all of their contributions if they or their spouses are covered by an employer-sponsored retirement plan. [Note that contributions to a Roth IRA are not deductible and income limits apply.] See Publication 590 for further information."

- http://www.irs.gov/retirement/article/0 ... ,00.html#1

http://www.irs.gov/publications/p590/ch ... 1000230381

If you got a different answer from a CPA (that is, if that CPA told you that contribution to a traditional IRA by a taxpayer who (a) has earned income and (b) is participating in a qualified plan is permitted only if that taxpayer's Adjusted Gross Income is below a certain level), you might get back to that CPA and tell him to check Pub 590 (the URLs above are for the web version of Pub 590). He (or she) should thank you.

Bottom line: If you have earned income, you can contribute to a traditional IRA. The amount you can contribute is the lesser of your earned income or $5,000 ($6,000, if you're over age 50) (reduced by any contributions to a 501(c)(18) plan).
"This is the most that can be contributed regardless of whether the contributions are to one or more traditional IRAs or whether all or part of the contributions are nondeductible. (See [url=http://www.irs.gov/publications/p590/ch01.html#en_US_publink1000230507]
Nondeductible Contributions
[/url]," (IRS Pub 590)

- John L. Olsen, CLU, ChFC, AEP

[SouthBayAdvisor]

John,

Thanks very much for the reply. I appreciate it.

So basically anyone (even Bill Gates) can contribute to a non-deductible traditional IRA (no matter if they add to a qualified plan or not)...correct?

Thanks again.

[Bradly T.]

Correct again. And, as of 2010, they can two step their contributions into a Roth by conversion with applicable proportionate recognition.


John - whether Roth or Trad., is a nonworking spouses contribution amount limited to the contribution of the working spouse? If working spouse contributes $3k, can nonworking spouse contribute $4k? I've always used that rule but my CPA knows of no such limit.

[SouthBayAdvisor]

Thanks again. Forgot to ask this initially.

There are provisions when you are covered by a retirement plan at work. Does that mean you are active and actively participate or does that mean a retirement plan at work just has to exist?

[Bradly T.]

Neither....you must be "eligible" to participate. So, you start a job in September where there is a plan but you are not "eligible" to participate until January. No income limit applies first tax year (Sept - Dec)....unless of course you were eligible at a prior employer at any time during that same year (even one day). Non-participation does NOT remove eligibility standard. Eligibility triggers the income limits.


I don't know this.....given scenario above, eligibility starts in January but employer makes a profit share contribution (no match as no employee funds were deposited) in March. That probably means no IRA deduction for employee because they were a "participant" for prior year due to spring profit share distribution???? This stuff will give you a headache.