Author Topic: Extremely low compensation and IRA contributions in joint filing families  (Read 1424 times)

little_brown_dog

  • Pencil Stache
  • ****
  • Posts: 912
I looked around on the forum but couldn't find anything that seemed specific to my situation, so I am seeking new advice from all you tax savvy mustachians. I think my return to very part time work might have messed up our IRA contributions/tax implications for the last year…any insight is much appreciated!

Overview – married filing jointly, AGI/mAGI <184k (170k ish), husband covered by a 401k at work and a vanguard rIRA, I have a tIRA at vanguard and not covered by an employer plan.

Details – I quit my job to become a SAHM effective Jan 1, 2016. We rolled my old employer 403b into a tIRA at vanguard so that we could continue to contribute 5500/yr in my name despite my lack of income (aka spousal IRA). No problem. I had no employment or income from Jan 1-Sept 2016.

In September, I had the unexpected opportunity to start working VERY part time to keep my foot in the door professionally (a few hours a week). I opted out of the employer retirement plan due to a lack of match for part time employees and to ensure that I would still be eligible to contribute to my tIRA at vanguard. The trouble is, my taxable compensation/earnings from Sept-Dec 31, 2016 is extremely low….<2000 gross for the year. We contributed 5500 to my tIRA for 2016, so my contribution ended up higher than my personal earned income by about 3500. I am now trying to figure out if this is acceptable (because we are joint filers and we meet all other contribution criteria) or if I will be subjected to a penalty because I’m not allowed to contribute above my own earned income to my tIRA even if we file jointly.

Everything I can find talks about single filers and taxable compensation restrictions (they can’t contribute above their taxable income amount), or completely non-earning spouses and their ability to have a spousal IRA (they can contribute up to the max provided the household AGI and other criteria are met). I can’t seem to find anything that can tell me clearly how extremely low earners who jointly file with their spouse should handle their IRA contributions.

So I guess my questions are:

1 – Do I have to limit my IRA contributions to whatever I personally made (2k) even if I file jointly?

2 – What is the easiest/most fool proof way of remedying the situation if needed? Can I just forgo my tIRA deduction in my taxes, and then next year make sure I account for 2016’s excess? Or do I have to formally withdraw the funds from the IRA before the tax deadline?
« Last Edit: January 02, 2017, 02:58:05 PM by little_brown_dog »

little_brown_dog

  • Pencil Stache
  • ****
  • Posts: 912
Looks like I am able to answer my own question, but wanted to post for others. Turns out low earners can still contribute up to the max amount in the IRA, as long as they are filing jointly. Their low earned income only limits them to a lower amount if they are filing separately.

https://www.irs.gov/publications/p590a/ch01.html#en_US_2016_publink1000230412

Under: Kay Bailey Hutchison Spousal IRA Limit

"Example.

Tom and Darcy are married and both are 53. They both work and each has a traditional IRA. Tom earned $3,800 and Darcy earned $48,000 in 2016. Because of the Kay Bailey Hutchison Spousal IRA limit rule, even though Tom earned less than $6,500, they can contribute up to $6,500 to his IRA for 2016 if they file a joint return. They can contribute up to $6,500 to Darcy's IRA. If they file separate returns, the amount that can be contributed to Tom's IRA is limited by his earned income, $3,800."



MDM

  • Senior Mustachian
  • ********
  • Posts: 11473
Easiest question I ever answered. ;)

Good for you!