AGI limitation for deductibility of IRA
I have a client who was a member of a union in 2008. He was covered by the union’s pension plan. He earned $100,000 in 2008. He and his wife, who is a homemaker, contributed a total of $12,000 into their IRA’s in 2008. Is any of the $12,000 capped due to his being covered by the pension plan? Thanks.
Permalink Submitted by mk foss on Mon, 2009-06-22 21:05
The phase-out range for married filing jointly in 2008 is $85,000 – $105,000 for active participants. A partial deduction is allowed within that range.
The phase-out range where one spouse is an active participant and the other one is not covered by a plan is $159,000-$169,000.
Permalink Submitted by Alan Spross on Tue, 2009-06-23 00:24
In this situation, the non working spouse qualifies for a fully deductible TIRA contribution, so her contribution can stand as is. For the employee spouse near the top of the phase out range, the contribution should be recharacterized as a Roth IRA contribution no later than 10/15/09. This will avoid filing an 8606 to report a small non deductible basis in his TIRA.
But before acting, note that his “earnings” do not determine whether he is over the deduction limit, rather it is modified AGI which includes many other sources of income. If modified AGI reaches 159,000, HER deduction begins phaseout as well and so does either of their ability to make a Roth contribution.
If the wage earner already has a basis per Form 8606, he could simply figure the deductible portion and file a new 8606 to report the non deductible portion of his contribution. This would avoid recharacterization and possibly opening a Roth account. However, a Roth account is always better than a non deductible TIRA contribution. Yet another option would be to withdraw the non deductible portion as a return of contribution and leave in only the small amount that can be deducted. That avoids the 8606. With all these solutions, their individual circumstances should be determined to see which works best for them.