Author Topic: Tax Professionals: Can I contribute to a traditional IRA? Stupid govt language  (Read 4366 times)

chemgeek

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I'm a post-doc at a government facility. I"m not an employee, nor am I a contracter. I'm on a "fellowship" through a program called ORISE. They're very clear that this is not wages, it's a stipend to cover living expenses. I pay quarterly estimated income taxes, but SS and medicare are not withheld from my checks each month, nothing is withheld. I was told that I cannot contribute to IRAs because I'm not earning taxed income. I can sort of see this but at the same time I don't. Am I disqualified from a traditional IRA?  If so, can my husband make spousal contributions into an IRA in my name as a work around?  I assume that even though the govt is making it clear I'm not making "income", my stipend is still going to be used against us when determining MAGI and phase out limits for the IRA deduction.  If this is the case, I'm one of the highest earning technically unemployed people I know.  Which seems like bullshit to me. They get their income taxes and I don't get to have a tax advantaged retirement account.

The scenario
Me: "not employed", earning $69,500 gross, no benefits (retirement, health insurance or otherwise), I started this position in June, and won't have income listed from Jan-May.
 
Husband: $80,000 gross, with access to a 401k program at work.


We aren't currently maxing out the 401k ( yes I know, that would be one solution to this), mainly because we're paying off student loans and stashing cash for a house. Our contribution is around 12k a year. I want to have the option of depositing extra bits of money when it comes along into an IRA, but from what I got told today, that's not allowed. Any suggestions?
« Last Edit: October 30, 2014, 12:49:42 PM by chemgeek »

MDM

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Yes, fellowships have pros and cons.

See http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits for spousal IRA limits.

With $149,500 gross combined, you can afford to maximize 401k and IRAs and any other tax-advantaged thing you can find.

Good luck!

GreenPen

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I looked into all of this when I was in a similar situation a few years ago. But I'm not an expert, so take this with a grain of salt:

You can still contribute to your traditional IRA, but only because of your spouse has enough earned income. Your fellowship counts as income, but not earned income. It makes sense that the fellowship counts toward your MAGI because its income. But because the fellowship is not earned income (which is also why you don't need to pay SS and medicare), you can only contribute to an IRA because of your spouse.

It should be to your benefit that your fellowship is treated the way it is.

chemgeek

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Thanks RedPen. This makes more sense to me, and I'll try to look into that. I was told by labmates that I wasn't even able to put any money into an IRA, because our stipends aren't defined as income. I could see not necessarily being eligible for the deduction given our combined gross, but being completely ineligible seems weird to me since I'm married.
« Last Edit: October 30, 2014, 05:55:10 PM by chemgeek »

MDM

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chemgeek, it's just the law - it doesn't have to make sense....

E.g. see https://ttlc.intuit.com/questions/1186274-taxable-scholarships-do-not-correctly-contribute-to-earned-income and http://www.bogleheads.org/forum/viewtopic.php?t=58606 for others who have been in your situation.

I'm sure you are "earning" your fellowship but the university is allowed to claim that you aren't (and thus they don't have to pay the employer portion of Soc Sec, etc.), and congress and the IRS have set things this way.

mlipps

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I think your combined income puts you over the TIRA cap so I'm not sure it really matters. But you can definitely contribute to an IRA (be that Roth or Traditional) as a spousal IRA.

chemgeek

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@mlipps: That is where I'm having trouble. Reading the income limit chart ( which is the same for spousal IRAs), whether or not we qualify for the deduction depends on which perspective you follow. I have a spouse that has a 401k. If I were considered employed, the  limit would be $183,000 MAGI for contributions in my name. If my HUSBAND wanted to put money in an IRA for himself and I was employed (since he has a 401k), the limit is $ 96,000. So my confusion is with spousal contributions, is the MAGI limit from my perspective since it's in my name or his perspective since he's the one actually making the contributions? Complicating matters, my husband's salary was a raise up to 80k (previously 65k) starting in August, and I'll only be reporting 39k, so we could possibly squeak in under both limits this year. 

I understand that the law doesn't have to make sense, it hardly ever does honestly! What is confusing me is how the same labels have been treated differently for me, hence why I'm seeking clarification.   I paid SS and FICA the first few years of grad school even though it was also called a "stipend" for living expenses. My last year of school I went on an external "fellowship", also for living expenses, and was not obligated to pay those. Really this all just adds to me questioning whether the PhD was worth it. Jury is still out.

mlipps

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I do a LOT of taxes at my VITA site but I can't tell you the answer to this one sadly. I bet you could find it if you weed through the IRS tax case rulings for similar situations. Personally though, even with my love of taxes, I would just take the easy way out and contribute to a Roth. Or, contribute to Traditional see what happens, and if they complain, recharacterize your contributions, although you might risk owing some small penalty on your excess refund that way.

beltim

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@mlipps: That is where I'm having trouble. Reading the income limit chart ( which is the same for spousal IRAs), whether or not we qualify for the deduction depends on which perspective you follow. I have a spouse that has a 401k. If I were considered employed, the  limit would be $183,000 MAGI for contributions in my name. If my HUSBAND wanted to put money in an IRA for himself and I was employed (since he has a 401k), the limit is $ 96,000. So my confusion is with spousal contributions, is the MAGI limit from my perspective since it's in my name or his perspective since he's the one actually making the contributions? Complicating matters, my husband's salary was a raise up to 80k (previously 65k) starting in August, and I'll only be reporting 39k, so we could possibly squeak in under both limits this year. 

I understand that the law doesn't have to make sense, it hardly ever does honestly! What is confusing me is how the same labels have been treated differently for me, hence why I'm seeking clarification.   I paid SS and FICA the first few years of grad school even though it was also called a "stipend" for living expenses. My last year of school I went on an external "fellowship", also for living expenses, and was not obligated to pay those. Really this all just adds to me questioning whether the PhD was worth it. Jury is still out.

I'm not sure of the confusion here.  According to: http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-NOT-Covered-by-a-Retirement-Plan-at-Work because you're not covered by a retirement plan at work (you don't have access to a 401k).
Your filing status is married filing jointly, so go to that box.  Then, it depends on your modified AGI.  Of note is that this page does not depend on your employment status.

The page at http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014-IRA-Contribution-and-Deduction-Limits-Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work suggests that your husband would have different limits on deductibility based on AGI - but this makes sense, as he has access to a retirement plan at work and you don't.   

So, it looks like you can deduct contributions to a traditional IRA in your name if your married tax return shows a MAGI under $181,000.
« Last Edit: October 31, 2014, 10:06:03 AM by beltim »