Deductible Traditional IRA Contribution Inquiry

Submitted by Kevin O'Hearn on Thu, 2020-10-29 17:36

Hello,

If there is a married person (under age 50) whose income eligibility for making a deductible Traditional IRA contribution for 2020 is $196k-$206K. The same income eligibility applies to their ability to make a Roth contribution.

For simplicity purposes let’s say their income is exactly $201k so they can fall exactly in the middle of the phase out range. I have 2 questions:

1. In this example, they would be able to make a $3k deductible Traditional contribution AND a $3k Roth contribution, correct?

2. The total $6k limit is aggregated between the two account types, but they are not aggregated for the purposes of eligibility and phase out ranges, correct?

Any feedback would be greatly appreciated. Thank you.



Submitted by David Mertz on Thu, 2020-10-29 18:12

Both are correct.  For this individual to be subject to the same phase-out range for both, this individual’s spouse, but not this individual, must be covered by a workplace retirement plan.  The calculation of MAGI adds back the deductible traditional IRA contribution in either case, so the MAGI will be the same for both (as long as there were no taxable Roth conversions or taxable rollovers to a Roth IRA from the traditional account in a qualified retirement plan, in which case the MAGI for making a Roth IRA contribution would be lower than the MAGI for deducting a traditional IRA contribution).  The amount contributed to one type of IRA has no bearing on eligibility to contribute to or deduct contributions to the other.  This individual’s spouse can also make a Roth IRA contribution of $3k but any traditional IRA contribution the spouse makes would be nondeductible because the spouse’s MAGI is well above the $104k to $124k phase-out range for the spouse who is covered by the workplace retirement plan.  (It’s assumed that there is sufficient compensation to support all of the IRA contributions.)



Submitted by Alan - IRA critic on Thu, 2020-10-29 18:40

  1. No, not correct. The total of TIRA and Roth IRA contributions is limited to 3000 subject to rounding rules. In applying the limitation, the Roth contribution must be reduced by the amount contributed to the TIRA. See worksheet 2-2 in Pub 590A. The end result is an aggregate contribution total of 3000, that can be split in any combinatio between the TIRA and Roth IRA. 
  2. After the max Roth contribution is calculated using the MAGI phaseouts in the usual manner, the above worksheet on line 10 subtracts that limit from the amount contributed to other IRA (meaning TIRA accounts whether deductible or not).


Submitted by David Mertz on Thu, 2020-10-29 19:24

[Deleted]



Submitted by Kevin O'Hearn on Thu, 2020-10-29 21:31

 Hi Alan,   I just want to clarify that in my example the person has more than $6,000 of earned income. You referenced worksheet 2-2. I completed it using the parameters in my example and even when inputing that a $3,000 Traditional contribution was made, the worksheet still indicated that a $3,000 Roth contribution would also be allowable.   Can you please confirm your answer? My contention is that someone with at least $6,000 of earned income and an MAGI right in the middle of the phase out threshold (which are identical in my example) should be able to make the reduced Roth contribution of $3,000 and be allowed for the reduced Traditional IRA deduction of $3,000.   Please confirm. Thanks! 



Submitted by David Mertz on Thu, 2020-10-29 22:37

I retract my previous retraction.  I think that Alan misunderstood line 10 of Worksheet 2-2 to be a subtraction from line 8 rather than from line 6, a misunderstanding that I adopted until you mentioned your results from Worksheet 2-2 and I reexamined the worksheet.



Submitted by Alan - IRA critic on Thu, 2020-10-29 22:49

Yes, that is what I did, probably because I expected the aggregate limit to be 3k. To clarify, the person can make a 3k contribution to both IRA types.



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