Limits of IRA contributions in 2021
(H)usband 74, (W)ife 70 in 2021. Their combined Adjusted Gross Income (AGI) is going to be about $210,000 in 2021 consisting
of interest, dividends, taxable IRA distributions because of RMD, ss taxable income, capital gains, small annuity income. Included in $210,000 is $1,200 salary (for H only). None of them have
other pension plans or 401k plans at work; (H) is the only one with a salary in 2021.
1. Can H make a $1200 traditional IRA contribution in 2021 for himself. Is it deductible to him?
2. Can W, the non-working spouse, make also a $1200 traditional IRA contribution in 2021 for herself. Is it deductible to her?
3. If either 1 or 2 above contributions would be non-deductible, what should be their combined AGI
be in 2021 to make those IRA contributions tax deductible. They can control their AGI somewhat by reducing
their capital gains by selling less stocks
4. If none of the IRA contributions are deductible and their AGI is $210,000 can each still make the $1,200 IRA contribution, just that it will be non-deductible.
Permalink Submitted by Alan - IRA critic on Tue, 2021-11-02 21:34
If neither spouse is a participant in a workplace retirement plan at anytime in 2021, a TIRA contribution can be deducted.
The non working spouse could make a deductible spousal contribution, but the total contributions for both cannot exceed the earned income of 1200.
The contributions are not subject to an income limit when neither spouse is a workplace retirement plan participant. Note that making deductible TIRA contributions at 70 or later will reduce future QCD benefits up to the amount deducted. And their joint MAGI is barely too high to make Roth contributions instead unless they reduce MAGI by avoiding realized gains, or they take cap losses.
Although they qualify for the TIRA deduction, it is not mandatory. They could report the 1200 contribution as non deductible on Form 8606, but if the contributing spouse already has a fully pre tax TIRA, they might not want to mix in non deductible contributions. If either spouse has no TIRA now, the best option might be to make a non deductible contribution for that spouse and then convert it right away to a Roth IRA tax free. Note that the QCD offset can be easily overcome if a 1200 TIRA Deduction is taken by increasing the next QCD by 1200, and the rest of the QCD in excess of 1200 would offset the RMD taxable income for that year. The 1200 not eligible for QCD could be itemized as a deduction if they have high enough itemized deductions.
Permalink Submitted by alberto vega on Wed, 2021-11-03 20:46
Assuming in 4 above H contributes $1200 to a new separate non -deductible IRA . H alaready has non-deductibe traditional IRA of about $300,000. W has now a ROTH IRA of about $20,000 and a traditional non deductible IRA of about $15,000.Can then H convert the $1200 non-deductible IRA to a Roth IRA for H. Is there a tax to pay on the $1200 conversion from taditional IRA to Roth IRA. What happens to the interest earned in the traditional IRA before the Roth conversion. is that interest added to the Roth? Is that interest taxable in 2021 when transferred from the traditional IRA to the Roth IRA?
Permalink Submitted by Alan - IRA critic on Wed, 2021-11-03 22:28
Having separate accounts does not change the tax impact of a distribution or conversion, since all TIRA accounts are treated as one combined account. So while non deductible TIRA contributions exist, there is no such thing as a non deductible TIRA account. The figure to know is the IRA basis that shows on the most recent Form 8606 for each spouse. It does not sound like H’s basis is actually 300,000, rather it appears that an account to which non deductible contributions were made is now worth 300,000 including pre tax gains. If H converts 1200, Form 8606 will determine the taxable portion by pro rating H’s basis of non deductible contributions against the adjusted year end value of all his non Roth IRA accounts. This might be more clear if you worked through a Form 8606 with H’s specific numbers. H must also have properly filed an 8606 to report non deductible contributions for each year. Reporting a conversion on Form 8606 will generate the taxable/non taxable portion of the conversion and show how much basis is left on line 14 to carry forward to the next year.