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Author: mrparrotfez Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120809  
Subject: IRA understanding Date: 12/8/2007 12:43 AM
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My wife has a 401K through her job, to which we contribute significantly (close to max). I do not have a 401K, but I do have an IRA. I am 44 and she's 46; married filing jointly.

I've been reading through posts here and want to make sure I'm clear: we are allowed to open an IRA for her as well, provided we do not somehow together exceed our earned income (that would be pretty sad if we only had $8000 in earned income anyway). Right? I was always under the impression that her 401K prohibited her from making a deductible contribution to an IRA as well, but I'm beginning to think I was wrong.
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97107 of 120809
Subject: Re: IRA understanding Date: 12/8/2007 12:55 AM
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My wife has a 401K through her job, to which we contribute significantly (close to max). I do not have a 401K, but I do have an IRA. I am 44 and she's 46; married filing jointly.

I've been reading through posts here and want to make sure I'm clear: we are allowed to open an IRA for her as well, provided we do not somehow together exceed our earned income (that would be pretty sad if we only had $8000 in earned income anyway). Right?


Right.

I was always under the impression that her 401K prohibited her from making a deductible contribution to an IRA as well, but I'm beginning to think I was wrong.

Don't be too hard on yourself. You may not have been wrong.

While anyone under age 70 1/2 with either taxable compensation or a jointly-filing spouse with taxable compensation can make an IRA contribution of some sort, if either spouse is covered by a retirement plan at work, deductibility of traditional IRA contributions is subject to the AGI-based phaseouts explained in Chapter 1 of IRS Publication 590. If only one spouse is covered the phaseout ranges are different for each spouse.

It could well be that your traditional IRA contribution is deductible but your wife's is not. In that case, she could make nondeductible traditional IRA contributions, but she's probably eligible to contribute to a Roth IRA (Chapter 2 of Pub 590). A Roth contribution is always better than a nondeductible traditional contribution. It's one of the few no brainers in our simplified tax law.

Phil

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Author: mrparrotfez Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97108 of 120809
Subject: Re: IRA understanding Date: 12/8/2007 10:37 AM
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>>While anyone under age 70 1/2 with either taxable compensation or a jointly-filing spouse with taxable compensation can make an IRA contribution of some sort, if either spouse is covered by a retirement plan at work, deductibility of traditional IRA contributions is subject to the AGI-based phaseouts explained in Chapter 1 of IRS Publication 590. If only one spouse is covered the phaseout ranges are different for each spouse.<<

I looked this up. It appears that we are in that neck of the woods where we can almost certainly take a partial deduction, but a full deduction is in question, thanks to me having a good year this year with the pen.

>>It could well be that your traditional IRA contribution is deductible but your wife's is not. In that case, she could make nondeductible traditional IRA contributions, but she's probably eligible to contribute to a Roth IRA (Chapter 2 of Pub 590). A Roth contribution is always better than a nondeductible traditional contribution. It's one of the few no brainers in our simplified tax law.<<

I looked this up too. Since we're in the partial realm on Chapter 1, we're well below the boundary on Chapter 2. I've already made my own TIRA contribution for this year, and will make mine for next year on the first business day of 2008, but would like to expand our retirement saving. If we started a Roth for my wife, we probably wouldn't have to wait until year-end to decide how much was eligible. Which would mean that we could get it invested sooner.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97109 of 120809
Subject: Re: IRA understanding Date: 12/8/2007 11:21 AM
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I looked this up. It appears that we are in that neck of the woods where we can almost certainly take a partial deduction, but a full deduction is in question, thanks to me having a good year this year with the pen.

I looked [Roth limits] up too. Since we're in the partial realm on Chapter 1, we're well below the boundary on Chapter 2.


Something got muddled here, either in your reading or in the translation.

Your traditional phaseout range and both your Roth phaseout ranges are the same. (Your wife's traditional phaseout range is lower than yours.)

If you don't feel comfortable posting actual numbers in this venue, feel free to e-mail me a response and I'll take a look.

Phil

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Author: mrparrotfez Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97112 of 120809
Subject: Re: IRA understanding Date: 12/8/2007 12:20 PM
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I don't mind posting thumbnail numbers here. Our 2006 AGI was $72K. Next year I expect it to be higher, perhaps $76K-78K. I make my max $4000 TIRA contribution each year. The box on my wife's W-2 about a retirement plan was checked last year and should be this year, as she contributed $10000 to a 401K.

Of course, we will consult our CPA on this as well. But I like to know what I should expect to hear before I do, and what questions to ask.

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Author: reallyalldone Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97114 of 120809
Subject: Re: IRA understanding Date: 12/8/2007 12:37 PM
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Are you eligible for a SEP IRA ? (you mentioned pen so I was wondering if some might be freelance work) If so, you're in a whole different ballpark for retirement savings.

rad

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97115 of 120809
Subject: Re: IRA understanding Date: 12/8/2007 12:55 PM
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Our 2006 AGI was $72K. Next year I expect it to be higher, perhaps $76K-78K. I make my max $4000 TIRA contribution each year. The box on my wife's W-2 about a retirement plan was checked last year and should be this year, as she contributed $10000 to a 401K.

You: Your traditional IRA contribution is fully deductible. Another response mentioned a SEP. If you are eligible to contribute to a SEP and do so, that means you are also "covered" by a retirement plan, and your phaseout range would be the same as your wife's.

Your wife: She's in the phaseout range for deductibility of traditional contributions. One approach would be to contribute to her traditional IRA up to the point that it's no longer deductible, with the balance of her maximum IRA contribution going to a Roth. You're easily within the AGI limits for Roth contributions.

Since the deadline for 2007 IRA contributions doesn't come until 4/15/2008, you have plenty of time to get your exact figures and work from there.

Phil

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Author: mrparrotfez Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97116 of 120809
Subject: Re: IRA understanding Date: 12/8/2007 12:56 PM
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I'm eligible, but my freelancing would have to make me more than it does in order for the SEP to be more advantageous.

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Author: mrparrotfez Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97117 of 120809
Subject: Re: IRA understanding Date: 12/8/2007 1:02 PM
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Interesting, Phil. I didn't realize one could contribute to a TIRA and a Roth in the same year; I thought it was either/or. Many thanks for the information. What we'll do is tell our CPA that we intend to make the max advantageous retirement contribution for both of us this year, and let him tell us what that is once he runs our taxes. (Must hope and pray that the K-1s aren't late.) We are investing some inheritance money so the problem is not affording the contributions, but legally sheltering all possible income from current and future tax.

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Author: reallyalldone Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97118 of 120809
Subject: Re: IRA understanding Date: 12/8/2007 1:11 PM
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We are investing some inheritance money so the problem is not affording the contributions, but legally sheltering all possible income from current and future tax.

Don't let the tax tail wag the dog. If you are planning to retire early, paying capital gains on a taxable account may be more advantageous than paying income tax on IRA money. Of course, the tax crystal ball needs to accurate, too.

rad

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Author: sandyw54 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97155 of 120809
Subject: Re: IRA understanding Date: 12/10/2007 11:22 AM
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A Roth contribution is always better than a nondeductible traditional contribution. It's one of the few no brainers in our simplified tax law.

Phil



I agree unless you are retired like me and your income is all from pensions. Then you're out of luck for a Roth. One of my pensions is taxed but that's not good enough for the IRS. It shouldn't matter. Income is income. But there's nothing I can do about it.


Sandy

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97156 of 120809
Subject: Re: IRA understanding Date: 12/10/2007 11:43 AM
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A Roth contribution is always better than a nondeductible traditional contribution. It's one of the few no brainers in our simplified tax law.

I agree unless you are retired like me and your income is all from pensions.


In which case you can't make either, so the Roth preference is moot.

One of my pensions is taxed but that's not good enough for the IRS. It shouldn't matter. Income is income.

Well, first my standard advice when you don't like something in the law. Write your members of Congress.

Now for why I disagree with you. The purpose of tax-advantaged retirement accounts is to encourage people to save for retirement. Once you're actually retired, there's no longer that need, except for people who don't really need all their incoming cash and would like to get yet another tax benefit. I don't buy it from a policy standpoint. Enough is enough.

Phil

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Author: sandyw54 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97157 of 120809
Subject: Re: IRA understanding Date: 12/10/2007 2:24 PM
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Now for why I disagree with you. The purpose of tax-advantaged retirement accounts is to encourage people to save for retirement. Once you're actually retired, there's no longer that need, except for people who don't really need all their incoming cash and would like to get yet another tax benefit. I don't buy it from a policy standpoint. Enough is enough.

Phil



Forgive me. I thought the name of this board was Tax Strategies, not Tax Strategies Before Retirement. I didn't know there was an age beyond which a person has no right to try (within the rules) to save money on taxes. (I was given a disability retirement from the fire department in 2001 at age 50; not a typical retirement age).

I mentioned the Roth because I had opened one a few months ago and then realized I had failed to read closely enough the IRS rules for contributions that said I was ineligible. I immediately called and closed the account. I probably could have gotten away with keeping it and the chances are slim I would have been caught but it wasn't right to keep it active.

But I guess now I need to stop contributing to my traditional IRA's and cash them in so I won't get "yet another tax benefit". According to you I need to keep all my incoming cash close at hand and not let it work for me. Since you retired I can only assume that you refuse to take advantage of any legal option to pay less tax.

Having said all that you have every right to disagree with me.

Sandy

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97158 of 120809
Subject: Re: IRA understanding Date: 12/10/2007 3:32 PM
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Forgive me.

Done.

I thought the name of this board was Tax Strategies, not Tax Strategies Before Retirement. I didn't know there was an age beyond which a person has no right to try (within the rules) to save money on taxes. (I was given a disability retirement from the fire department in 2001 at age 50; not a typical retirement age).

One of the problems with moving directly into snit mode is that you stop paying attention to what's being said and race off reading all sorts of things into it that aren't being said. I in no way even implied that you have no right to try, within the rules, to save money on taxes. I even told you the one way you can try to do it in your given scenario.

I mentioned the Roth because I had opened one a few months ago and then realized I had failed to read closely enough the IRS rules for contributions that said I was ineligible. I immediately called and closed the account. I probably could have gotten away with keeping it and the chances are slim I would have been caught but it wasn't right to keep it active.

The chances are 100% that you'd be caught. IRA custodians are required to report all contributions to the IRS, which matches them against returns. If IRS sees an IRA contribution with no corresponding "taxable compensation," it almost jumps out of the computer as an excess contribution.

BTW, don't blame IRS for the laws Congress writes. ("...should be good enough for IRS," etc.) It's really not their fault.

But I guess now I need to stop contributing to my traditional IRA's and cash them in so I won't get "yet another tax benefit".

This is a prime example of what I was talking about regarding snit mode. It's your money, do with it as you wish. But I think shooting yourself in the financial (and tax) foot to achieve some weird sense of "I showed him" would be downright lower-case foolish.

According to you I need to keep all my incoming cash close at hand and not let it work for me.

Huh? I think it's terrific if you have more cash in than needs to go out, and I think it's terrific that you want to invest it rather than blow it on Twinkies. All I said was that you can't do it in a retirement account.

We talk all the time around here about Foolish ways to invest in regular taxable investment accounts while minimizing the tax hit.

Since you retired I can only assume that you refuse to take advantage of any legal option to pay less tax.

You assume incorrectly. I squeeze every nickel of deductions until the buffalo screams. (I have lots of time on my hands.)

Having said all that you have every right to disagree with me.

We occasionally discuss tax policy around here, but there was an additional reason for my comments.

As I mentioned, if you want to get the law changed, you need to let your legislators know. They really love hearing from constituents, especially in election years, and they love to introduce tax bills. You never know what well-pitched idea may catch some staffer's eye.

In any debate it's a good idea to anticipate arguments against your position. When you're pitching an idea if you can anticipate them and take a shot at neutralizing them, even better. It's also a good idea to work from facts as they are, not as you wish they were. The rationale I gave you for the creation of IRAs is fact.

So let's look at your situation. As you note, you retired early, and on top of that, on disability from a first responder public safety career. Not an unsympathetic platform from which to speak. You might want to point out that although IRAs were intended for people in their working years, yours were cut short. If you somehow manage to scrimp and save some extra cash each month, why shouldn't you be allowed to add to your retirement savings, at least until you reach normal retirement age?

Heck, it's an argument I'd even listen to.

Phil

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97160 of 120809
Subject: Re: IRA understanding Date: 12/10/2007 11:26 PM
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Phil, you have been one of my Favorite Fools for several years, since your advice saved my family thousands of dollars in excess taxes, using a deduction that our tax adviser missed.

I just want to say that your gracious response to someone whom you tried to help, but who responded to you in a "snit," is an example to us all. Since there's no way to make you a doubly-favorite Fool, please accept my sincere admiration for your gentlemanliness.

Wendy

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