Am I eligible for a tax deductible IRA in 2011?

The answer is this: The 2011 phase-out is from $56K-$66K, so there's no "about" about it, if you have an AGI of $56K you can deduct $6000. At $57K, $5400, etc. It's linear from 56-66, so each $1000 is $600 you can't deduct.

Since the Roth phaseout occurs much higher, why not put the difference right into a Roth if it's not deductible? From the numbers above, you have $45K or so of other income, right? If that's so, you may be a candidate for Roth conversions, a bit each year just keeping in the 25% bracket. Otherwise when you retire you may get caught in the "your social security is taxed" bubble.

If your AGI is 57,500 you will be able to deduct 5,100. 900 would be non-deductible and you might as well put it in a Roth, or you could still put it into the traditional IRA and file form 8606 this and all following years indicating that you made 900 in non-deductible contributions.

A couple of technical points:

1. The OP never provided his age. If he is at least age 70 1/2, then no contributions can be made to a traditional IRA.
2. The OP provided an AGI of 500. The formula for taking a deduction is based on Modified AGI (MAGI).

A worksheet to compute MAGI is on page 16 of IRS Pub 590. A worksheet to compute the amount deductible is on page 19 of the same pub.

She said over 65, but not under. You are correct in warning that the maximum age to contribute is 70-1/2. I tend to miss that point. No max on Roth, so if that's the case, she can save in Roth. Also right on MAGI, although the adjustments to AGI don't seem too common, they shouldn't be ignored.

A couple of points not mentioned in prior responses (or I missed them):

Since you're not looking at numbers on a tax return, a reminder that your 401(k) contributions have already reduced your gross income before you start your return. If your estimate of AGI didn't take those contributions into account, you're over estimating AGI.

If you are receiving Social Security benefits there's an interplay between taxable SS benefits and maximum IRA deduction. See page 14 of Publication 590.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Not quite true: No DEDUCTION for any contribution (IRC 219(d)(1)), and the contribution must also come back out in addition to the RMD. However, it can still be put in at the beginning of the year and withdrawn at the end (not the next return due date because of RMD rules). Any earnings may affect the RMD computation, but other than as required by the [revised] RMD computation, earnings need NOT be withdrawn.

Strange result, but Congress instead could have said no contribution. They didn't. Age is determined as of the last day of the tax year for this paragraph.

Sorry for the confusion. I guess I wasn't specific enough. I will be 66 at the end of 2011. I am already collecting Social Security Survivor's benefits AND earning a salary. When I figure my AGI I did take into account the 60% that I am putting into my 401k and the fact that 85% of my SS is taxable. However, I will fill out the "Worksheet For Social Security Recipients" to see if that changes my AGI.

Damn, I just realized that I forgot to include the Minimum Distribution that I get from my late husband's 401k, which is about $5k. Guess that will really put me over the top.

Thank you all for the information. If you have any more advice I'd be glad to hear it.

The reason that I wanted to contribute to a deductible IRA rather than a ROTH is that I believe when I stop working I may fall into the 15% tax bracket as opposed to the 25% bracket that I'm in now.

Question: MAGI is before itemized or standard deductions, correct?

On Mar 15, 11:16 am, Jane wrote: bracket as opposed to the 25% bracket that I'm in now.

Yes.

You might consider requesting a direct rollover (do NOT take funds into your name) from the 401(k) to an IRA. The IRA in your name will have no RMD till you are 70-1/2.

Thanks. No it's not the 401k money that I want to put into an IRA.

I think it may be more complicated because any contribution made in the year you turn age 70 1/2 is treated as an excess contribution. If you withdraw an excess contribution plus any earnings prior to the due date of your tax return, it is treated as if the contribution had never been made. If you just pull out the contribution and leave the earnings in the account, you have an excess contribution subject to the excise tax. Theoretically, one could compute two different RMDs for the subsequent year (the year after you turn age 70 1/2). If you made the excess contribution in the year you turned age 70 1/2 and it was still in the account at year-end, the RMD calculated for the next year would include the full balance at the previous 12/31. If you then remove the excess and earnings before the due date, the contribution is treated as if it was never made. Seems to me that if it was never made, one should recompute the balance at the previous 12/31 without the excess and earnings and obtain a revised RMD.

I understand, the suggestion was simply to help you have more control, there would be no RMD, and the conversion to Roth if desired would be far easier. 401(k) transactions are somewhat painful in my opinion.

I'm going to disagree with this. Section 4973 imposes a 6% excise tax on any excess contribution - but as the contribution was pulled out by year's end, it was properly reversed in such a way that the tax does not apply. That section does not tax any accumulated earnings on such a contribution.

So, just what excise tax are you thinking applies to the earnings on the withdrawn contribution? Perhaps you were thinking of the 10% excise per

72(t) or 4979? For 72(t), the taxpayer meets the age exception (over 59.5 years), and for 4979, it does not apply to IRAs.

I actually said "If you just pull out the contribution and leave the earnings in the account, you have an excess contribution subject to the excise tax." Leaving the earnings in the account creates an excess contribution subject to the 6% excise tax.

Leaving the earnings in the account also means that the contribution can not be treated as if it never happened. Therefore, the RMD for the subsequent year has to be based on the actual balance in the account on

12/31. If the taxpayer left the contribution and earnings in the account at 12/31 and pulled out the contribution and earnings before the due date, the RMD should be based on the 12/31 balance less the contribution and any earnings through 12/31. If he just pulls out the contribution after 12/31 but before the due date and leaves the earnings, the transaction is considered to have happened and the RMD would use the actual 12/31 balance.

contribution.

I suggest you read section 4973 again.

Note that my answer also treated the withdrawn contribution as not "never happened."

I'm sorry but I missed replying to the above clip. The law says you can't contribute in Sec. 408(a)(1) (see below). It does this by limiting your contribution to the amount deductible in Sec. 219.

Clearly a strange way to say you can't contribute... but that is what it says.

(a) Individual retirement account For purposes of this section, the term ''individual retirement account'' means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements: (1) Except in the case of a rollover contribution described in subsection (d)(3) in (FOOTNOTE 1) section 402(c), 403(a)(4), 403(b)(8), or 457(e)(16), (FOOTNOTE 2) no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219(b)(1)(A).

Not my day... it's not the excise tax he is subject to, it is income tax he is subject to if he fails to pull out the earnings prior to the due date. Sec. 408(a)(1) says distributions are taxable under section 72. Sec. 408(d)(4) provides an exception to taxation for contributions returned before the due date. However you must comply with all the rules in order to not pay tax on the distribution.

1. Do it before the due date including extensions.
2. You don't take a deduction under Sec. 219 for the contribution.
3. You include any earnings on the contribution in the distribution.

If you only take the contribution out and you leave the earnings, you fail the test and the distribution is subject to income tax under Sec.

408(a)(1). I haven't checked but I believe the instructions to trustees for coding the 1099-R state that they can only use Code 8 or P if the earnings come out. They are left with using a 1 or a 7 for the distribution.

contribution.

contribution

distribution.

...But since no deduction was allowed (or allowable) for such a contribution, there's a basis to allocate. Also, reversing a contribution does not make a distribution in the regular sense.

Because he fails the test in 408(d)(4) (he left the earnings in the account), he has a routine distribution subject to tax. I haven't read all the subtleties of the code to see if he is allowed to file form 8606 to establish a basis for a contribution made in a year (age 70 1/2) he is not allowed to make a contribution. Assuming for this purpose that he can establish that basis, then he would compute the taxable amount of all his distributions using the method in Part I of the 8606. No matter how you slice it or dice it, failure to comply with the 3 tests in 408(d)(4) makes for a taxable distribution.