How to Maximize IRA Contributions/Deductions

Submitted by Jay P. on Tue, 2017-02-14 21:51

Retired client (age 73) is receiving pension income ($114,000) from his years of service as a state of CT employee. He has been re-hired by the state and earns $31,000 of income, reportable on W-2. He is not eligible for the 403(b) plan offered by the state. His wife (age 69) is retired with only social security income.

Question is how do we maximize IRA contributions/deductions for both?

I understand he cannot contribute to a Trad. IRA b/c he is over age 70 1/2. Can he contribute to a Roth IRA since W-2 earnings are below phaseout range for married filling joint (I don’t believe pension income is counted)? Can a spousal deductible Trad. IRA be made for his wife until age 70 1/2 and then contribute to a Roth for her?

Any other suggestions? Thank you very much.

Jay



Submitted by Alan - IRA critic on Wed, 2017-02-15 01:01

  • Modified AGI for Roth contribution purposes includes non earned income including the pension income and the taxable portion of SS income if they receive SS. Therefore, they could be in or over the Roth contribution phaseout range. I assume you are asking about the 2017 IRA contribution.
  • Did he get a W-2 for 2016?  If so, determine if the Box 13 “Retirement Plan” is checked. For the DB plan he must be excluded under the terms of the plan (payout disregarded here) for the plan year ending this year in order for the Box in the 2017 W-2 not to be checked. The 2016 W-2 would just be an indication regarding his exclusion status even though that only applies to 2016. He may have to call the plan to ask about the exclusion to be sure. If he is excluded (Box 13 unchecked), the neither spouse is an active participant and spouse can receive a deductible TIRA spousal contribution as long as she will not reach 70.5 in 2017. Due to his age, his only IRA option is a Roth if MAGI is not too high. Note that IF he is an active participant for 2017, the same MAGI figure that  applies for Roth contributions also applies to his non participant spouse being able to deduct a TIRA contribution. She could always make either a TIRA contribution or a Roth contribution and recharacterize it later on, or if they want to avoid that, just wait until early next year to make their 2017 contributions. Yes, situation is quite complex!

Submitted by [email protected] on Wed, 2017-02-15 14:48

Okay….great….thank you.For clarification…..is the pension income and the taxable portion of social security also used to calculate MAGI phasout for a Traditional IRA contribution?

Submitted by Alan - IRA critic on Wed, 2017-02-15 16:39

Yes, both are included.

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