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Simple IRA and Traditional IRA

Hi,

My company offers a simple IRA with 2% salary contribution. In 2014 total contributions to the simple IRA was only about $1800.

Because of the low contributions I purchased a Traditional IRA for $6500 (I was 64 at the time).

I deducted the full 6500 from my income to calculate my taxes. I just received a notice from the IRS that they disallow Any deduction due to my Traditional IRA because I have a company Simple IRA.This seems illogical because my Simple IRA contributions were so low. According the the IRS I would have been better off cancelling my company Simple IRA and using the traditional IRA.

Seems like I should at least be able to deduct 6500 - 1800 = $4700.

I called the number on the IRS notification and they state that since I earned over 70000 in 2014 and was enrolled in a company Simple IRA that will disallow any deduction from the Traditional irregardless of the fact that my simple IRA only had total contributions of $1800.

Do I have any room to protest or am I out of luck.

Thanks Randy

Reply to
randyf valp
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As this appears to be 2014, you are out of luck. Here is what happened to you:

Your SIMPLE IRA is considered an employer plan. It has nothing to do with your Traditional IRA. Contributions to a Traditional IRA are fully deductible if you are not covered by an employer plan. If you are covered by an employer plan, your ability to take a deduction will depend upon your income. Your income was more than the allowable threshold, so you were not allowed to deduct any of your annual contribution.

On another note, if your Traditional IRA only contains your original $6500 investment plus some earnings, you may want to investigate the benefits of rolling it over to a ROTH IRA. Because you could not deduct your contribution, you created a cost basis in your IRA. Therefore, only the earnings would be taxable if you rolled it over to a Roth. But note this, regardless of whether you roll it over, you need to to file IRS Form 8606 for tax year 2014 with the IRS. Just complete Part I. This form establishes your cost basis in the IRA. The form can be filed by itself. Just make sure you sign and date it on page 2.

Reply to
Alan

Much thanks for the explanation and tip to roll it over to a Roth.

Very much appreciated.

Randy

Reply to
randyf valp

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