Taxes: Newly Married, Changed Jobs, 401K and Traditional vs Roth IRA

[neo von retorch]

In 2015, I contributed close to the max to my 401k in a job - last day was 12/4/2015. New job doesn't offer a 401k until 6 months in.
Married 8/13/2015.

Wife contributed ~5500 to a Traditional IRA.

Now we'll be filing our taxes together. Will her IRA be non-deductible because of my 401K and our combined AGI exceeding the limit?
If so, should we recharacterize it as a Roth IRA? (At this point, taxes have already been paid on her contributions - if they wouldn't be refunded, this seems to make sense to me.)

If I understand the footnote on this page: https://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the "Single" filing status.

We moved in together 9/1/2015. Would that mean that even though we file jointly for the 2015 tax year, her deduction can be determined under "Single"?

[dandarc]

Not enough information here to give a specific answer but:

1.  You were married in 2015, so you file married for 2015.  Sounds like you're filing married-filing-jointly, which is usually the best way.  We're talking about IRA deductions, which are basically eliminated entirely if you file separately, so no point in even discussing that option.

2.  There are potentially a few different limits that could come into play here in regards to tIRA contribution deductibility.  It is a situation where you look at the same MAGI (Modified AGI) for both of you, however you might be applying a different limit for each of you.  https://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

The simplest is for you - we know you have a 401K at work, so you compute your joint MAGI, and if it is less than $98K, you can make a full tIRA contribution.  Up to $118K, you can make a partial one.

For your wife - if she had access to a retirement account at work, exactly same boat as you.  If she did not have access to a retirement account at work, she can deduct fully at a joint MAGI of up to $183K, phased out to $193K.

So if your MAGI comes in between 118K and 183K for 2015, you could be in a situation where a contribution to her tIRA is fully deductible even though one for yourself would not be deductible at all.

[seattlecyclone]

It says you need to file separately and live apart for the entire year to use the single person income limits. Sounds like you plan to fail on both counts.

[dandarc]

Also note that 401K contributions will reduce your MAGI for this purpose.  So if say, you have gross salary of $100K between you and no other income or deductions of any kind, and you maxed out one 401K to the tune of $18K, your MAGI would be $82K for this purpose.

[neo von retorch]

Thank you dandarc. She does not have any sort of 401k retirement option at work, so it does sound like she could use the higher joint MAGI.

seattlecyclone - Well, no, we only fail on how we plan to file jointly.

If you ... did not live with your spouse at any time during the year

Check. We did not live together "at some point."

[dandarc]

That sentence is not 100% clear, but seattlecyclone and I read it as "married filing separately and did not (live with your spouse at any time of the year)".  You seem to be reading it as "married filing separately and (did not live with your spouse) at any time of the year"

The worksheet instructions are clearer to me - on page 35, IRA deduction worksheet, under line 2, it says:

Single, head of household, or married filing separately and you lived apart from your spouse for all of 2015, enter $71,000.

and

Married filing separately and you lived with your spouse at any time in 2015, enter $10,000.

So seattlecyclone's interpretation agrees with the instructions for 1040 - i.e. that you lived with your wife in 2015 at some point, and therefore you can't get that exception by filing separately.

[dandarc]

Just be sure - "covered by a retirement plan at work" is not limited to only 401Ks:

https://www.irs.gov/Retirement-Plans/Are-You-Covered-by-an-Employer's-Retirement-Plan%3F

pretty much any kind of retirement plan at work means you're covered - 401K, SEP or SIMPLE IRA, defined benefit plan.

[neo von retorch]

I'm sure :) It's a small business with zero benefits or benefit options (other than the paycheck.)

ETA: Fair enough. I read the sentence a few times, and I think it's "wrong" in the way it is worded there :)

[dandarc]

Cool.  Sounds like your MAGI falls in that tweener range where you have different limits for each spouse.

I personally just plug everything into TurboTax and let it tell me how much is deductible for each of us, then recharacterize to have the deductible amounts in traditional and anything else we do in Roth.  While we're both covered by workplace retirement, the last 2 years, we've landed in the phase-out range, so the deductible amount is not the full $5500 for each of us - one more area the software can help check your math on things.

[Merrie]

That was worded weirdly, but I do agree that it seems to be getting at "did you live together at all, at any point?" If you lived apart for the entire year vs. if you lived together for part of it but apart for part of it. Since you married during the year and live together now, you can (and likely should) file MFJ.

[neo von retorch]

FYI, while I was going through TurboTax, I saw that her IRA contributions were only at $4100 - I added the $1400 and TurboTax showed the immediate reduction in taxes, so I made the rest of the 2015 FY contribution and filed away!