Eligibility for TIRA contribution
I have reviewed IRS publication 590 and I believe that I am eligible to contribute $6,500 to a Traditional (deductible) IRA in 2016 for both myself as well as for my wife. Here is my situation:
I retired in April 2015. My wife retired many years ago. In 2016 I expect to have roughly the following income:
$80,000 taxable distribution from a non-qualified Executive Deferred Compensation plan.
$15,000 taxable bonus from my former employer, attributable to service in the first 4 months of 2015.
$2,500 RMD from an inherited IRA (Neither myself nor my wife are yet subject to our own RMDs)
Regardless of my MAGI, I believe I am fully eligible to contribute to a TIRA (for each of us) because I have earned income of $15,000 and I will not participate in an employer retirement plan in 2016.
I participated in a traditional pension at my employer, a defined benefit plan. It is fair to say that the plan contributed to my account in the first 4 months of 2015. I received a complete Lump Sum payment from this pension in 2015, and the plan’s fiscal year is January to December. Thus, I don’t believe I am deemed to have participated in this plan in 2016.
I contributed to the company 401k plan in the first four months of 2015. That 401k plan has a fiscal year of January to December, so I don’t believe I am deemed to have participated in this plan for 2016.
Neither I nor my company made any contributions to my Executive Deferred Comp plan in 2015. While I am not sure of the plan fiscal year, I assume the fact that there were no contributions in 2015 makes this plan moot for this issue.
In summary, after reviewing the 3 “retirement plans” in which I participated in 2015 I don’t believe I am disqualified from making a deductible IRA contribution for myself and my wife in 2016 (limited by the amount of the taxable bonus I receive in 2016).
(I do not plan to contribute any of the 2016 bonus to the 401k plan….and I am probably not allowed to contribute at this point anyway).
Have I overlooked any aspect of this issue?
Thanks.
Permalink Submitted by Alan - IRA critic on Mon, 2015-11-09 04:15
Sounds like each of you will be eligible for 2016 deductible TIRA contributions if you choose to. But 2016 sounds like a low income year so a Roth conversion may also be beneficial. The deductible TIRA contributions would offset an equal amount of Roth conversions, and even more so if your TIRAs have basis from prior non deductible contributions. Or you could make regular Roth contributions and then convert less since you would not be getting a deduction for regular Roth contributions.
Permalink Submitted by Andy Wagner on Mon, 2015-11-09 15:43
Thanks Alan for confirming my eligibility. I also appreciate the suggestion to convert TIRA funds to a Roth IRA while in low income years in early retirement.I will most certainly take advantage of this (temporary) low income year in 2016; however in my case it makes more financial sense to realize capital gains. I have some highly appreciated individual stocks (high appreciation due to tax loss harvesting over the past 15 years) and I plan to use those assets for spending in retirement. If I deduct $13,000 as a TIRA contribution, I not only reduce my ordinary income tax by 15%, but I also can take an additional $13,000 of capital gains at 0%. In addition, the lower AGI allows me to deduct an additional $1,300 of my medical costs in 2016. The bottom line is that the TIRA deduction saves me income tax at the equivalent of a 33% rate. (In contrast, converting to a Roth at 15% will allow me to avoid withdrawals at 25% later in retirement, for a much smaller savings of 10%. My income will be well above the cutoff for Social Security taxation, so RMD’s won’t have an impact on SS taxation.)Thanks again for your help.
Permalink Submitted by David Mertz on Mon, 2015-11-09 17:02
If you take a deduction of $13,000 for TIRA contributions and add $13,000 of LTCG income, your AGI will remain unchanged and you will not get any additional medical expense deduction.
Permalink Submitted by Andy Wagner on Mon, 2015-11-09 22:05
Thanks DMx, you are correct that the way I described the sequence of events will not result in a lower AGI. If a MFJ has a taxable income of $88k, then adds the $13k TIRA deduction you will see the three impacts – reduce income tax on $13k of IRA deduction, eliminate $13k of capital gains tax, and reduce AGI. At the very least, the first two impacts seem real even if the last one depends on where your starting point is. Thanks.