Confused-Unable to Receive Full Contribution $5500/IRA

[ForeverLearning]

So it's been 3 months since I've found MMM Community.....my,my where did the time go?

Anyway, I have read SO much in 3 months here & on the recommended sites, what a wealth of knowledge! However, I still feel I have so much to learn:-0

Here goes:
I was so excited to find out about the $5500 contribution to a IRA for Hubby & myself (Thank you Sol & Bacchi), it was really eye opening to see that we could reduce our tax responsibility by $11k.
So I'm all ecstatic tonight to start our taxes & get a shocker message:

"Traditional IRAs offer some great benefits, but they have restrictions too.
**** can deduct only $2,970 of the $5,500 contribution to a traditional IRA because * *** is covered by a retirement plan at work and your modified adjusted gross income of $107,229 is between $98,000 and $118,000. The difference of $2,530 is considered a nondeductible contribution."

WHAT HAPPEN?!? Where did we mess up?

So, please tell me if I am thinking logically going forward for 2017:
$5500-Spousal Traditional IRA
$3000-Hubby's Traditional IRA
$2500-Open a Roth IRA (Hubby's) *Since characterize as a nondeductible contribution, might as well diversify. Or not that big of a deal & just leave it in the tIRA?

* One side note, we got started late (Nov 2016) & was only able to get $15k of $18k for 401k, so I'm not sure if this year if we are able to fully max out the $18k that will wash out the $2500ish nondeductible contribution.

In a couple of weeks, thinking of going by library to pick up forms to play around with the numbers but wanted to come here & run it by you all to see if I'm not understanding the logic behind nondeductible contributions.

This is our first full year to try to get this right & we want to make sure we do not make a similar mistake going forward.

Thank you for your time.


 

[N]

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

[MoonLiteNite]

In short, you can only put into an tIRA if you make under a certain amount of money.
But anyone can put into a rIRA, so you best to switch over to that for the rest of the money.

[MightyAl]

I hit this a couple years ago.  But there are so many options it is not a big deal unless you absolutely have everything maxed. 

[Heroes821]

In short, you can only put into an tIRA if you make under a certain amount of money.
But anyone can put into a rIRA, so you best to switch over to that for the rest of the money.

To clarify you can ALWAYS put the cap into a tIRA, but your income has to be below the threshold to DEDUCT the full amount. With your income where it is I would maximize your tIRA for deduction then roth the rest.

Even if you make $500,000 each a year you can still contribute to a tIRA directly, you just can't claim it on income tax to reduce your tax burden.

[neo von retorch]

So are you maxing out the contribution plan(s) offered by your employer(s)?

Do that first, because those limits aren't income limited.

Then max out the available tIRA for each individual up to the limit.

And finally max out the Roth IRA with the remainder of the limit.

This year, it might be the breakdown you presented (aka $5.5k tIRA1, $3k tIRA2, $2.5k rIRA), but it could shift a little next year (especially if you increase contributions through your employer.)

If you've already made excess tIRA contributions, you can "re-characterize" the appropriate amount as Roth once you've set up the account. If you think about it, that money you put in there is "post-tax" but you were going to get the taxes back when you filed. Well, now you won't... but you'll also never pay any tax on that money in the Roth, or on the growth of those funds. So it's not terrible.

[RWD]

In short, you can only put into an tIRA if you make under a certain amount of money.
But anyone can put into a rIRA, so you best to switch over to that for the rest of the money.

Roth IRAs have income limits as well.
https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2017

Even if you make $500,000 each a year you can still contribute to a tIRA directly, you just can't claim it on income tax to reduce your tax burden.

Would this ever be helpful? Wouldn't you essentially be taxed twice on this money; once when you get paid and again when you take distributions?

[Heroes821]

Even if you make $500,000 each a year you can still contribute to a tIRA directly, you just can't claim it on income tax to reduce your tax burden.

Would this ever be helpful? Wouldn't you essentially be taxed twice on this money; once when you get paid and again when you take distributions?
[/quote]

Helpful, not sure. It's definitely not efficient, but if you can't back door roth from your employer 401k you should be able to roll the contributions into a roth IRA later when your income is lower which I think* would then need to be in the roth for 5 years before it could come out.

The point of the crazy high theoretical income number was to point out that the tIRA does not stop you from contributing to it when you make too much money AND have an employer retirement program.  The Roth IRA does have an income limit that 100% stops you from directly funding it when you make a bunch of money.  the tIRA simply wouldn't keep it's tax benefit with high income but you are still allowed to at least put money in it up to the cap. Oh and this roth rollover thing might work out if you also needed to artificially create income for qualifying for ACA or w/e comes next etc.

Also @OP if only one of you is covered by retirement at work the other that does NOT have an employer retirement account can always deduct the tIRA cap as long as you file jointly.  A non-working spouse can even do this when their personal income is $0.

[wudged]

Even if you make $500,000 each a year you can still contribute to a tIRA directly, you just can't claim it on income tax to reduce your tax burden.

Would this ever be helpful? Wouldn't you essentially be taxed twice on this money; once when you get paid and again when you take distributions?

Deductible and non-deductible contributions are tracked separately.  You would only pay taxes on the gains.

You also have the ability to roll it over to a roth ira so even the gains would not be taxed.

[RWD]

Even if you make $500,000 each a year you can still contribute to a tIRA directly, you just can't claim it on income tax to reduce your tax burden.

Would this ever be helpful? Wouldn't you essentially be taxed twice on this money; once when you get paid and again when you take distributions?

Deductible and non-deductible contributions are tracked separately.  You would only pay taxes on the gains.

You also have the ability to roll it over to a roth ira so even the gains would not be taxed.

Ah, I did not know that, thanks. So that's the same as a Roth IRA. Then what's even the point of income limits on the Roth IRA? Or why does the Roth IRA even exist if you can use a Traditional IRA the same way? (not that I expect tax law to make a lot of sense)

[ForeverLearning]

Thank you Everyone! You all are even bringing out points that I wasn't even thinking about. Appreciate everyone's patience. It's one thing to input information in a form its another to understand the form.

Am I understanding that we could transfer hubby's nondeductible contribution ($2500) into a rIRA now before the April 2017 deadline & IRS will not tax the Roth because it was a transfer from a tax advantaged account? We will only be taxed on gains when we use rIRA down the road?
Where are you all getting this info because when I go to the IRS website some of it's clear & other times I am more confused.

Also, I will not hit submit until Monday just to make sure I understand everything we are submitting.

**FYI-For anyone filing that have accts with Fidelity, so far it is $0 to file with TurboTax. At least this year.....

[GizmoTX]

Ah, I did not know that, thanks. So that's the same as a Roth IRA. Then what's even the point of income limits on the Roth IRA? Or why does the Roth IRA even exist if you can use a Traditional IRA the same way? (not that I expect tax law to make a lot of sense).


They're not the same when you reach retirement age: A traditional IRA will require you to take taxable distributions or be assessed a large penalty. A Roth IRA is never taxable & distributions are not required -- this is clearly better so the income & contribution limits apply.

[Heroes821]

Thank you Everyone! You all are even bringing out points that I wasn't even thinking about. Appreciate everyone's patience. It's one thing to input information in a form its another to understand the form.

Also @OP if only one of you is covered by retirement at work the other that does NOT have an employer retirement account can always deduct the tIRA cap as long as you file jointly.  A non-working spouse can even do this when their personal income is $0.

Thank you Heroes821 for this gem. I just want to make sure I understand: I am the non-working spouse with no income, does that mean I can transfer the $2500ish into my tIRA & I would get to benefit from the deduction or only if we do itemize deduction? We are doing standard deduction for $12,600, so not if sure if that would make a difference. OR
Did I misunderstand? You are saying as the non-working spouse I still get to deduct the $5500 despite not having income?

Am I also understanding that we could transfer the $2500 into a rIRA now before the April 2017 deadline & IRS will not tax the Roth because it was a transfer from a tax advantaged account?
Where are you all getting this info because when I go to the IRS website some of it's clear & other times I am more confused.

Also, I will not hit submit until Monday just to make sure I understand everything we are submitting.

**FYI-For anyone filing that have accts with Fidelity, so far it is $0 to file with TurboTax. At least this year.....

As a non-working spouse you can contribute and deduct the full $5500 tIRA amount that is in your name regardless of your joint income as long as you file jointly. 

This thread that I made had similar questions answered by some knowledgeable CPAs on this board: http://forum.mrmoneymustache.com/taxes/ira-spouse-and-401k-issues/
Specifically that your income has to be at least as much as the limit for the IRA.

So to congeal what others have said in this thread:
1) as a non-working spouse your retirement contributions pre-tax can be $5500 to a tIRA for the full deduction.
2) Next I would see if the 401k would let you continue contributions for 2016 until april 15th.
3) If the above already happened then I would play with the deduction calculators to see how much you can save from him funding a tIRA and still getting a partial deduction vs roth IRA.

I hope that's helpful.

[ForeverLearning]

Thank you Heroes821! That is very helpful.