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[[I have a Deferred Profit Sharing plan where I work which I contribute to regulary. The plan has
done very well and in addition to my monthly contributions I usually am able to add $1500 - $2000
lump sum at year end. This does not buy me anything at tax time however.]]

Well, it depends on if this is a "pre tax" or "post tax" plan. If it is a "pre tax" plan, then you actually DO receive a benefit. If it is a "post tax" plan, then you are correct. Without knowing anything about the plan, I can't really comment. But let's go with the assumption that it's a post tax plan.

[[ Would I be better off sticking my lump sum money into an IRA?]]

Perhaps. You'd save tax dollars on your annual $2k contribution. But that assumes that you'd qualify for a deductible IRA. As you may know, there are a number of restrictions since you are a member of your company's pension/profit/deferred comp plan.

In general, up to $2,000 a year in deductible IRA contributions can be made by a taxpayer, as long as he earns compensation at least equal to the contributed amount. For married couples filing jointly, up to $4,000 can be contributed, as long as their combined compensation at least equals the contributed amount.

The limitations apply where a taxpayer is an active participant in an employer-sponsored retirement plan. Under pre-'97 Act law, if a taxpayer is a participant in such a plan, the amount that can be deducted for an IRA contribution may be limited (or zero) depending on the taxpayer's adjusted gross income (AGI). For single taxpayers, no deduction is allowed if AGI is $35,000 or more. If AGI is between $25,000 and $35,000, the $2,000 maximum deduction is reduced, with the reduction amount increasing ratably as AGI increases towards $35,000. For married taxpayers filing jointly, the same approach is taken but the figures are different: no deduction is available if AGI is $50,000 or more, and the deduction is phased out for AGI between $40,000 and $50,000. Additionally, even if only one spouse participates in an employer's plan, the limitation applies to both spouses. To the extent the deduction limitation applies, the $2,000 maximum IRA contribution can still be made: it just will not be fully deductible (or deductible at all, depending on AGI).

The '97 Tax Act eases these rules in two respects starting in '98. First, for married couples filing jointly, if only one spouse is a participant in an employer's plan, the limitation only applies to that spouse. However, the maximum deductible IRA contribution for an individual who is not an active participant, but whose spouse is, is phased out for taxpayers with AGI between $150,000 and $160,000.

Second, the amounts triggering the limitations for plan participants are increased starting in '98, both for single taxpayers and married couples filing jointly. For single taxpayers the limitation range is increased to $30,000-$40,000 for '98 (i.e., the maximum IRA deduction is reduced if AGI exceeds $30,000 and is zero if it is $40,000 or more). For '99 the range increases to $31,000-$41,000; for the year 2000 to $32,000-$42,000; for 2001 to $33,000-$43,000; for 2002 to $34,000-$44,000; for 2003 to $40,000-$50,000; for 2004 to $45,000-55,000, and for 2005 and later years to $50,000-$60,000.

For married couples filing jointly for '98 the maximum IRA deduction for the participant-spouse starts being reduced at an AGI of $50,000, but only reaches zero for AGI of $60,000 or more. For '99 the range increases to $51,000-$61,000; for the year 2000 to $52,000-$62,000, for 2001 to $53,000-$63,000; for 2002 to $54,000-$64,000; for 2003 to $60,000-$70,000; for 2004 to $65,000-$75,000; for 2005 to $70,000-$80,000; and for 2006 to $75,000-$85,000. For 2007 and later years, the phase-out range expands to $20,000, and increases to $80,000-$100,000.

(For married couples filing separately, the phase-out range remains at zero to $10,000 as under pre-'97 Act law.)

Example. John and Gina Corcoran file jointly in '98 with joint AGI of $75,000 comprised largely of compensation income. John is an active participant in his employer's plan but Gina is not. Any IRA contribution John makes is not deductible, but Gina can deduct up to $2,000 in IRA contributions.

Note, in this example, that if the joint AGI were $55,000 instead of $75,000, John would be able to deduct up to $1,000 in IRA contributions. Since their AGI is only halfway between the $50,000-$60,000 range, the deduction limitation would only be reduced 50%: from $2,000 to $1,000. Gina would still be able to deduct her entire $2,000 contribution.

Hope this helps...
TMF Taxes
Roy

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