Question about deductibility of Contribution to Traditional IRA

My spouse is a part-time employee. She gets not benefits, does not participate in a 401K and does not work enough hours to get any kind of pension benefit when she retires. Based on the IRA rules and our income, it appears that we can make a deductible IRA contribution as long as she is "not covered by a retirement plan at work". I had assumed that this was the case, but her employer has checked Box 13 on the W-2 for Retirement Plan. We asked them about this and they said yadda yadda that she's covered but not vested yadda yadda or something to that effect.

Pub 590 says re. Defined Contribution Plans that "if an amount is allocated to your account for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the account." Also, it says re. Defined Benefit Plans that "if you are eligible to participate in your employer's defined benefit plan...you are covered by the plan ...even if you...did not perform the minimum service required to accrue a benefit for the year."

So I have two questions.

1) This all seems kind of ridiculous that she may be legally considered "covered" but she has no actual coverage. Is there a way out of this?

2) We recently made the contribution to her Traditional IRA (for

2006), thinking it was deductible. I know that we can leave it there as a non-deductible contribution and keep track of this separately (headache). Is there some way to "undo" the contribution (probably another, possibly bigger headache) without involving a penalty (she is under age 59 1/2)?

Thanks.

Reply to
pixel_a_ted
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No.

What headache? You fill in three lines of Form 8606 and file it with your return.

Consider recharacterizing it to a Roth contribution if your income levels allow.

Reply to
Rich Carreiro

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