IRA Eligibility
A dentist whose business is a sub-chapter S corporation makes a salary of $70,000 and has $350,000 of non-wage S corporation income (not subject to FICA). He offers a Simple IRA through his office and he participates in the Simple plan. The dentist also took a $5,000 tax deduction on his 1040 for an IRA contribution.
My questions are these: Is he permitted to take this IRA deduction since he was a participant in an employer sponsored retirement plan? When determining deductible IRA eligibility, and since he is a participant in a Simple IRA, doesn’t he need to account for all of his income ($70,000 plus $350,000) and not just the $70,000 of wages? It almost seems as though the dentist thinks that because his WAGES was only $70,000, that now he is eligible to participate in the Simple AND take an IRA deduction. I don’t see any scenario whereby this person can make an deductible IRA contribution. Any insight is greatly appreciated! The rules get a little confusing as it relates to what is considered “earned” income and what is looked at when considering AGI limits.
Thank you!
Permalink Submitted by Alan Spross on Thu, 2009-07-02 00:19
You are correct. As a retirement plan participant, his income is way over the limit for anything but a non deductible TIRA contribution. Modified AGI is used to determine income limits for the deduction and earned income is only a part of that figure. While S Corp taxation is not my strong suit and this does not affect the IRA situation, I wonder if his salary is representative of the value of his services vrs the other income. Understating the salary portion can result in problems.
He might consider making the non deductible contribution to a TIRA, filing Form 8606 and then converting some to a Roth starting next year when income limits for conversions no longer apply. That conversion would be taxable under the pro rate rules using the balances in all TIRA, SEP or SIMPLE IRA accounts.
Permalink Submitted by Bruce Steiner on Thu, 2009-07-02 02:40
If his salary were $245,000, he could make a much larger contribution to a profit-sharing/401(k) plan.