ira deductiooon

[Chief]

Tax Act will not allow me to post an ira deduction for a person who made a $6500 ira contribution because his W2 shows he partipation in a retirement plan.
His income was $126400.What gives?


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46500

[Roberts]

Assuming MFJ = to receive a deduction, income is limited to $115k if you participate in a work retirement plan.
Single it's $69k.

[FEDUKE404]

IRA limits refresher

Tax Act will not allow me to post an ira deduction for a person who made a $6500 ira contribution because his W2 shows he partipation in a retirement plan.
His income was $126400.What gives?

Them's the rules !! Can't blame that on TaxAct.

Oh yes - that's why Box 13 on the W2 **IS** important !!

Suggest you visit: http://www.irs.gov/Retirement-Plans/...t-Plan-at-Work

FE

[Lion]

So, it's a nondeductible IRA contribution that your client can immediately move to a Roth.

[Roland Slugg]

So, it's a nondeductible IRA contribution that your client can immediately move to a Roth.

Oh, yeah? And what about the remaining $200,000 in that person's IRA that represents amounts deducted in prior years?

[DaveinTexas]

Yeah

And what about the codified substance doctrine? That doesn't get much press lately, I'm just being a smarty pants though.

[Roberts]

Oh, yeah? And what about the remaining $200,000 in that person's IRA that represents amounts deducted in prior years?

Would you explain please how this is relevant?

[Burke]

He's talking about the rule that you have to convert all IRA funds to a ROTH, not just the one you are making this year and then trying to convert.

[joanmcq]

He could recharacterized the current year contribution to a Roth, if within the income limits to actually make a Roth contribution.

[DaveinTexas]

Or stated another way

If you deem a Trad IRA contribution non deductible (form 8606) and then convert it to a Roth, the amount you recover tax free from this depends on the total value of the before tax contributions in the Trad IRA.

Example: Trad IRA value at year end: $60,000, of which $6,000 is the amount you just chose to not deduct. The rest of the Trad IRA consists of contributions you deducted each year in the past. This means that if you were to convert $6,000 of this Trad IRA to a Roth, you would pay tax on all but 10% of the conversion. You can't just pick and choose which of your funds you like to convert, you have to use the ratio to figure the tax free/taxable portion.

Math: $6,000 / 60,000 = 10%. $6,000 X 10% = $600. The remainder, $5,400, would be subject to tax.

This backdoor method only works well if your Trad IRA has little or zero funds each year prior to the Non Deductible Contribution.

[Roberts]

This backdoor method only works well if your Trad IRA has little or zero funds each year prior to the Non Deductible Contribution.

Except the OP posted that this was a 2013 contribution which could easily be recharacterized today without any of this problem.

He needs to contact the investment firm's Retirement Plan department and have them recharacterize and he's done.

[DaveO]

Had a long term client in this year. He got married a few years back and the wife has been meeting me for the appointment. He is always upset that he does't get as big a refund since she makes only about $20k per year and doesn't have much withholding. He has even filed seperate a few times so he didn't have to pay "her" taxes. This year I asked him why the refund was such a big deal since it is his money anyway. He said "I always put that money into my ROTH IRA". I asked him why he never told me about the ROTH before or indicated on the organizer that he had one to which he replied that it didn't make any difference anyway. I told him it makes a big difference on a MFS return. Wait for the notice I guess.