Income Phase Out for tIRA Deduction - how does it work? what if you go over?

[Gen Y Finance Journey]

I'm working on tax planning for 2017 and I'm hoping that a mid year raise will push my salary to the point where I can't get my MAGI low enough to claim any deduction for tIRA contributions. But there is of course the chance that I'll end up being in the phase-out range and still be able to claim a partial deduction. I'd like to understand what my investment strategy should be.

If I'm within the phase out range, how does it actually work? Do you deduct the first $X up to a certain point, or do you deduct a certain % of your total contribution?

If I go over the deductability range completely and can't deduct anything, but still contribute to a tIRA, is that money stuck there, or can it be withdrawn as contributions to Roth IRAs can?

I'm assuming the right strategy is to wait until I know what my 2017 MAGI will be (which unfortunately won't happen until I get my end of year bonus, likely in January 2018) before deciding whether to invest in a tIRA or Roth. That just sucks because I would much prefer front-loading my contribution or at least spreading it out over the year.

Am I thinking about the situation correctly? What is the right strategy?

[seattlecyclone]

If I'm within the phase out range, how does it actually work? Do you deduct the first $X up to a certain point, or do you deduct a certain % of your total contribution?

It's the former. You get to deduct 100% of your contributions up to your lower limit.

If I go over the deductability range completely and can't deduct anything, but still contribute to a tIRA, is that money stuck there, or can it be withdrawn as contributions to Roth IRAs can?

If you leave it there it's a non-deductible traditional contribution, which you likely do not want. You may wish to recharacterize that part of your contribution to Roth. Search for that term elsewhere for more info. If you wish to avoid the bother of recharacterizing, you may want to wait on your IRA contribution until you have a better idea about what your MAGI will be.

I'm assuming the right strategy is to wait until I know what my 2017 MAGI will be (which unfortunately won't happen until I get my end of year bonus, likely in January 2018) before deciding whether to invest in a tIRA or Roth. That just sucks because I would much prefer front-loading my contribution or at least spreading it out over the year.

You can front-load and recharacterize as needed, or wait until later to get it right the first time. Which one is more optimal depends on how much you value not needing to contact your IRA provider to do a recharacterization.

[Gen Y Finance Journey]

Thanks so much, that's very useful information!

[Gen Y Finance Journey]

Reviving this thread with a new question.

I'm the breadwinner and my husband is a SAHD. I had just assumed that if my income puts me over the threshold to deduct tIRA contributions, that would apply to his spousal IRA as well, but now I'm questioning that. Since he doesn't work, does he fall into the "not covered by a retirement plan at work, but has a spouse that is covered" category, which would mean his threshold for deductions is significantly higher? Or does a non-working spouse fall into the same category as the working spouse, with the same threshold for deductions?

[MDM]

...does he fall into the "not covered by a retirement plan at work, but has a spouse that is covered" category, which would mean his threshold for deductions is significantly higher?

Yes.

[MetalCap]

From a previous thread:

https://www.irs.gov/taxtopics/tc451.html

Has a worksheet that was pretty simple for me to hamfist what I could deduct this year and next (2016 wife ended work, 2017 wife will have no w2)

This will show that can be deducted from each person and overall Roth and tIRA eligibility.