Apr 24, 2008

Q & A: Another IRA Contribution Question

QUESTION: I retired due to a neuro-degenerative illness in 2002. I receive long-term disability benefits from my previous employer as well as Social Security disability. The disability policy benefits are classified as third-party sick pay and I receive a W-2 for the benefit each year. The disability benefit is taxed like regular income. My wife works full time and contributes to her employer's 401(k) plan. She'll fully fund a Roth IRA this year as well. We file our taxes as married/joint and have an AGI of about $140K. I'm under 50; my wife is over 50. I'm trying to determine if I qualify to open a traditional IRA. It's difficult to determine if my disability benefit is considered "compensation" under the IRS guidance (Pub 590). If so, it looks like I might be able to open a spousal IRA. Any thoughts here?

ANSWER: The deductibility of traditional IRA contributions is limited. For a couple filing a married joint tax return for 2007, the deduction is phased out entirely when modified AGI reaches $103,000. For purposes of calculating modified AGI, your Social Security benefits are deducted from this total. But the long-term disability benefits are included in the modified AGI amount. So it appears as though you will not qualify for a traditional IRA contribution. We would suggest that you consider making a Roth IRA contribution. Although it is not deductible on your current year tax return, you can take tax-free distributions from this account provided funds have been held in the account for a 5 year period.

2 responses:

Rob April 26, 2008 at 3:35 PM  

Just curious what you thought about this information from SmartMoney. Also, it appears that the traditional IRA contribution would be fully deductible using the guidance in Appendix B of IRS Publication 590.

From SmartMoney "An IRA Primer", Who's eligible for an IRA (tax-deductible)? 09 Jan 2008
http://www.smartmoney.com/retirement/ira/index.cfm?story=supertable

6. A married person who does not actively participate in an employer-sponsored retirement plan but whose spouse actively participates in such a plan, provided the couple files jointly and has joint AGI below $169,000 (subject to phase-out rules starting at $159,000).

Rob April 26, 2008 at 3:39 PM  

Just curious what you thought about this information from SmartMoney. Also, it appears that the traditional IRA contribution would be fully deductible using the guidance in Appendix B of IRS Publication 590.

From SmartMoney "An IRA Primer", Who's eligible for an IRA (tax-deductible)? 09 Jan 2008
http://www.smartmoney.com/retirement/ira/index.cfm?story=supertable

6. A married person who does not actively participate in an employer-sponsored retirement plan but whose spouse actively participates in such a plan, provided the couple files jointly and has joint AGI below $169,000 (subject to phase-out rules starting at $159,000).

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