After tax contributions to a traditional IRA to lower AGI

Submitted by Brian Mason on Thu, 2017-11-02 22:40

Have often wondered how to do this and if it is legal. Does the IRS really care if you don’t file form 8606 and then go ahead and use the contribution as a deduction ? An example of this would be for reducing AGI to get under the MAGI limits.

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Permalink Submitted by Alan - IRA critic on Thu, 2017-11-02 23:40

You cannot deduct the contribution if your income is too high and you are an active participant (or spouse is at a higher income limit) in a workplace retirement plan. However, if you can deduct the contribution you have an option not to and would report the non deductible contribution on Form 8606. If you do not or cannot deduct the contribution and do NOT file the 8606, then there is no basis established in your IRA, and you will eventually be double taxed on the contribution when you take IRA distributions.
Even you deduct the contribution, your AGI will be reduced. However, MAGI for IRA or Roth IRA contribution purposes will NOT be reduced since for MAGI the deduction must be added back to the AGI.
I am not sure what you are trying to accomplish. Please clarify that if the above explanation is confusing.

Permalink Submitted by Brian Mason on Fri, 2017-11-03 13:54

I may be over the MAGI limit for 2017 for ACA subsidy, not much maybe $200. So instead of going over the MAGI limit and paying back $6k I am wondering if I can open a traditional IRA and make a $200 “after tax” contribution. Basically yes I would be doubled taxed but which would you want to pay, extra tax of maybe $20 or the $6k subsidy ?

Permalink Submitted by Alan - IRA critic on Fri, 2017-11-03 15:59

With respect to ACA MAGI, you can only deduct TIRA contributions that appear on p 1 of Form 1040. Deductible contributions are reported there, but non deductible contributions are not and neither are Roth contributions. Therefore, you would need to qualify and make a deductible contribution and report it on line 32 of Form 1040 in order to reduce your ACA MAGI. All you need to do is determine if you qualify for a deduction or partial deduction since you only need a $200 deductible TIRA contribution to reduce ACA MAGI by that amount.

Permalink Submitted by Brian Mason on Fri, 2017-11-03 20:46

Meaning I think I can go forward with it. I am 61 and collecting a pension, that pension and what I get fron my rolled over 401k to an IRA @ Fidelity is baciscally what my wife and I live on. She is 60 and does have part time earned income. So from what I can tell we are eligible for a deductable TIRA due to the fact that either of us have have the luxury of having a workplace retirement. So getting back to the question, are you agreeing that you can make a deductable contribution to a TIRA using after tax dollars, then NOT file for 8606, then pay the “extra” tax when the TIRA deductable amount is distributed ???

Permalink Submitted by Alan - IRA critic on Sat, 2017-11-04 03:46

If neither of you is a participant in a workplace plan, you can deduct your contribution. Whenever you deduct the contribution, you do not file Form 8606. That is only for non deductible contributions. When you take distributions from the IRA the will be taxable except to the extent the IRA owner made non deductible contributions in the past. That would not be an extra tax because this money has never been taxed. You only pay a double tax if you make a non deductible contribution and fail to report it on Form 8606. That does not apply to you, unless this happened in some prior year.

Permalink Submitted by Steve Hagedorn on Thu, 2017-11-09 15:17

Not sure if an HSA compliant Health Insurance plan would work for you, but if it is a consideration you and your wife could make a family (HSA contribution + catch up = $7750) which directly lowers your AGI and does not require that you have earned income to make an HSA IRA contribution while other IRA contributions do.