Combat Pay and IRA Phaseouts
Hello, I have a question on how combat pay is treated with regard to the phase out limits for IRA and Roth IRAs.
Looking at the IRS’s Armed Forces Tax Guide, I see the below:
Is My Combat Pay Included in IRA Calculations?
For IRA purposes, your compensation includes nontaxable combat pay. Even though you don’t have to include the combat pay in your gross income, you do include it in your compensation when figuring the limits on contributions, and on deductions for contributions, to IRAs.
So I understand it can make you ineligible for deducting a traditional, but is this also saying it can put you over the phaseout limit for a Roth as well?
Appreciate any guidance on this question.
Permalink Submitted by Alan - IRA critic on Wed, 2018-12-12 20:29
No, this does not affect Roth contribution eligibility. Note that modified AGI (MAGI) determines the ability to take a TIRA deduction, and recipients of combat pay (treated as eligible taxable comp while being non taxable) can use this income to qualify for a contribution. However, the retirement plan box on the W-2 will also be checked showing the recipient as covered by a workplace plan. If MAGI without the combat pay is high enough to exceed the threshold, the recipient will not be able to deduct the contribution, and would then opt to make a Roth contribution instead. So the issue is not the amount of combat pay, it is the retirement box being checked along with other MAGI being too high. This is ackward to explain, and probably why the IRS chose not to provide a complete explanation in the guide.
Permalink Submitted by John Cooney on Thu, 2018-12-13 03:01
Thanks!