Employer Defined Benefit Plan Kicks You Out of Tradtional IRA???

[curiousinvestor]

Hi,

This is my first post, so forgive me for any mistakes in my question. I have a headache researching this issue so far and could use some help!

I have a friend who is in a union in NY that has an employer defined benefit plan. He has been told by the pension plan folks and by his accountant that he cannot contribute to a traditional IRA. This seems strange to me.

Here is what the pension plan person generally said:
"This is a defined benefit plan where contributions are exclusively done by the employer. Since it is exclusively funded by employer, participants are excluded from certain IRA accounts, including traditional IRA's. However, he can contribute to a Roth IRA still." (He makes too much money so he can't do a Roth, which is why I want him to do a traditional.)

This is what I believe is happening and what a Vanguard IRA specialist thought:
"It sounds like they are getting confused with deductability. Your friend can still contribute to a traditional IRA, but he will not be able to get a deduction because he makes too much money. He cannot do a Roth because he makes too much. But he can still contribute $5,000 this year in a nondeductable traditional IRA."

I called the pension people again, and they said:
"Some of our members have contacted us saying that they received a letter from the IRS saying that they cannot contribute to a traditional IRA because of our defined benefit pension plan, so we have advised people to not do a traditional IRA." Unfortunately, the person couldn't help me any further. I don't see this regulation in IRS publication 590.

I would appreciate any help anyone could offer. I am not a CPA, but I'm somewhat knowledgeable about investing/IRA's/401k's, etc...this problem here is driving me crazy!

[erchess]

Instead of getting frustrated

why not suggest to your friend that he consult a tax adviser, preferably a CPA, Tax Attorney or Enrolled Agent in his area? BTW the Vanguard Adviser is correct. Anyone may contribute to a traditional IRA. His tax adviser will need to track the nondeductible contributions each year on Form 8606 to keep the IRS apprised of the fact that he is making nondeductible contributions. When it is time for retirement, distributions due to nondeductible contributions and the gain from nondeductible contributions are not taxed. However if he doesn't file the Forms 8606 year by year he will end up being taxed on the money when it comes out..

[curiousinvestor]

Thanks erchess,

Yes, I should suggest to him to get educated for himself, but I kind of jumped into this also because I get interested in this stuff for some reason. Also, if the pension people are incorrect, they are potentially misadvising hundreds or thousands of people in the union.

I left out in my original post that my friend's co-worker consulted a tax person (not sure if it was a CPA/tax law attorney) who said he couldn't do a traditional IRA. So there were multiple sources who have said this, but then again, I have multiple sources who say they are wrong. I believe they are getting confused with the word "nondeductible." In their minds, this means "can't do traditional IRA."

[Snaggletooth]

No deduction

He has been told by the pension plan folks and by his accountant that he cannot contribute to a traditional IRA.

I believe this to be untrue. What is true is that he cannot DEDUCT his contribution.

Curiousinvestor, we underscore the need to find a local tax professional of good standing, preferably an EA, or CPA, or an attorney who specializes in taxes. The fact that this kind of misinformation is floating around your friend is clear proof that a tax pro is needed. Also, if your friend's retirement is done right, this should be a very personal and specialized thing, so any advice given over a bland forum such as this is bound to be full of pitfalls. Considering the thousands of dollars at stake, an appointment with a tax pro is very low cost by comparison.

[Lion]

Can't Deduct

It wouldn't be the first time I had a client mis-hear "You can't deduct a traditional IRA" as "You can't do a traditional IRA" when an adviser explained the situation correctly. If he wants the IRA to reduce his current year taxes, he can't do that. If he wants to save in a tax-deferred way for retirement, he can do that.

[David1980]

Hi,
I called the pension people again, and they said:
"Some of our members have contacted us saying that they received a letter from the IRS saying that they cannot contribute to a traditional IRA because of our defined benefit pension plan, so we have advised people to not do a traditional IRA." Unfortunately, the person couldn't help me any further. I don't see this regulation in IRS publication 590.

I see. I asked a coworker of mine. When asked what thought about what I told him that a forum post said that the union pension people said about what people had told them he told me this story about how his third cousin's roommate once sat next to a relative of a US president while on a plain trip to Guam.

I'm not sure how this relates to your problem though.

[JoshinNC]

And CuriousInvestor's "friend"

can convert the nondeductible traditional to a ROTH in 2010 irregardless of income level and only owe tax on the gains, thus providing the desired result anyways. And the tax on the conversion can be spread over 2 tax years (at least under current law).

Again, find a knowledgable tax pro, maybe one who also specializes in securities and retirement plans.

I know a couple of really good ones on this board.

[drdino]

Roth conversion 2010

The roth unlimited income conversion available in 2010 is an awesome planning tool we have been using for high net worth clients since introduced in 2006. It is always advisable to seek the advise of a CFP/EA/CPA before making long term financial decisions that can have a compounded negative effect if done wrong.

[jim s]

retirement

i was a member of the teamsters in Boston mass, and while the employer made the contributions to my retirement i also made contributions to it and fill out a 8606 to keep track so i would not get taxed on my portion of the retirement, hope this helps you...jim s