quick question re: taxes and IRAs..

[Ender510]

I am doing my friend's taxes.. he is opening a traditional IRA for the first time this year, before April 15. While doing the taxes, Turbo Tax seems to categorize the $2k contribution as "Nondeductible Traditional IRA".. is this correct?? I want to make sure this is allowing him to pay less taxes..

 

[glenn1]

It may be non-deductible. If your friend is an "active participant" (i.e., has a 401k or other type of retirement plan) and over IIRC $40,000 in Modified Adjusted Gross Income, the Traditional IRA contribution won't be deductible. In that case, he should file Form 8606 with his taxes, so that it gets reported as a non-deductible contribution, and doesn't pay taxes on it a second time when it's distributed from his IRA plan.

 

[Ender510]

I think I only understood half of what you said.. =) Let me elaborate a bit.. I found out where it determines when it unchecks it or not. There is a check on the 13: Retirement Plan section. The income they paid for the year is around 30k total. The return is $700. However, when I uncheck that box, it jumps to about $1000. So it's a difference of $300 just from changing the Retirement Plan checkbox.

I am using Turbo Tax for TY2001. In box 14, there is CASDI 267.47. I am not sure if this relates or not.. please let me know your thoughts - thank you!

 

[linuxboy]

It may be non-deductible. If your friend is an "active participant" (i.e., has a 401k or other type of retirement plan) and over IIRC $40,000 in Modified Adjusted Gross Income, the Traditional IRA contribution won't be deductible.

Hi. .

Your numbers are a tad off, but that's ok since rules changed this year

starting with 34 K MAGI at the full 3K max deduction for filing single, the amount decreases by $200 for each $1000 increase in MAGI. For joint filing, the MAGI starts at 54 K for the full 3K deduction and for every 1 K MAGI increase, there is a $200 deduction decrease. It's a phaseout thing, the IRS has a publication on it.

You are right about being an active participant in an employer-sponsired retirement plan, then the contribution is non-deductible and the better option may be a Roth since the tax has to be paid anyway. Oh and if you get a trustee, you can just do rollovers if income fluctuates without hassle.

In the case of a spouse, if one is a participant in an employer-sponsored plan (like a 401K) and the joint MAGI does not exceed 160 K, then a deduction can be taken for the spouse who doesn't participate.

This gets kinda messy, there are so many little things to remember.


In that case, he should file Form 8606 with his taxes, so that it gets reported as a non-deductible contribution, and doesn't pay taxes on it a second time when it's distributed from his IRA plan.

If that's the case, why not just do a Roth? If you want tax-deferred growth, there are other options like annuities, VULs, or really any non-qualified plan you want as long as you follow IRS guidelines for non-qualified (no deduction) tax-deferred retirement plans.

Ender510, it may be worth it to go to a CPA. Being audited bites the big one. . If you don't understand what's going on and are just checking and uncheking boxes, then it may be time to ask for some professional help.

Though I may be wrong, some people have no business being accountants.

The income they paid for the year is around 30k total.

I'm sorry, how exactly does one pay income? One can receive income or pay wages... You're asking questions that need much more data to fully answer. There are many changes this year in the tax code, make sure you're up on them to avoid mistakes.

Cheers !

 

[Ender510]

Woops.. let me clarify a bit. The income MADE was about 30k. Filing separate but married. Itemized deductions come out to be about 7k total..

I am using Turbo Tax. Any other clarifications necessary? Thanks in advance..

 

[foggy]

Man, I hate taxes... this is the first year that I'll be submitting taxes in this country. The amount of forms and confusion is incredible. Why doesn't someone just overhaul the tax system? I find it complicated, but I may just be dumb or I suspect more accurately, I don't have the time to learn this. Which is why they have CPAs I guess... what a hoax. Creating a complicated tax system to keep the IRS and thousands of people in jobs.

 

[Ender510]

bump

 

[Jokeram]

i'll help ^ this.. have no idea whats going on there but know will need help on the 15th

 

[Ender510]

bumpp!

 

[linuxboy]

Woops.. let me clarify a bit. The income MADE was about 30k. Filing separate but married. Itemized deductions come out to be about 7k total..

Ok.

I am using Turbo Tax. Any other clarifications necessary? Thanks in advance..

First of all, the contribution is 3 K for 2002-2004, not 2 K. Second of all, it should be fully tax deductible with that ordinary income (it is ordinary income, right? You're still not giving me enough information, I'd have to take a look at what you've done to see if it's right). Third, what is the exact estate and retirement plan look like? There can be so many other factors that play into IRA deductions that TTax may indeed be accurate in classifying it as nondeductible. Isn't there a help or explanation by line in TTax? See why it classifies it as that and try to figure this out, you have the data, whereas I do not.

And now you know why you pay CPAs money to do this; it really is much less hassle to get the return done correctly. So far, it sounds like you can deduct 3 K this tax year toward a traditional IRA. If I may ask, where exactly is it being invested? And please don't say checking account or muni bonds.

Cheers !

 

[Ender510]

Traditional IRA was just opened. However, the place of employment offers a 'Retirement Plan' and the checkbox for 13 is CHECKED for Retirement Plan. Because of this, Turbo Tax classifies the Traditional IRA as a 'Nondeductible'. If I uncheck the box on Turbo Tax, the return is $300 back.

Also, this is for tax year 2001, which requires the IRA to be opened and deposited BEFORE April 15 and the amount would be $2K. For tax year 2002+, it goes up ($3, $3.5k for 50 and over)

Anyhow - given all these factors now... I decided to open a ROTH IRA instead so at least some benefit will be gained from an IRA being opened...

New question - is it worth doing 401K if there is ZERO matching from the company? Thoughts? Thanks again everyone..

 

[Ender510]

I just found out:

Married Filing Separately
For married persons filing separate returns, the AGI limitation is so severe as to virtually prohibit a Roth IRA contribution. For married/separate filers, the "phase-out" range is between $0 and $10,000. This means that a married/separate filer will never be able to take a full Roth IRA contribution, and when AGI rises above $10,000, no Roth IRA contribution will be allowed whatsoever.

So if around 30k was made, then it would be pointless to open a ROTH IRA then as well??? Is this true?

 

[linuxboy]

[]bTraditional IRA was just opened. However, the place of employment offers a 'Retirement Plan' and the checkbox for 13 is CHECKED for Retirement Plan. Because of this, Turbo Tax classifies the Traditional IRA as a 'Nondeductible'. If I uncheck the box on Turbo Tax, the return is $300 back.[/b]

Then it is non-deductible, TTax was right, though the contribution can still be made with back-load taxes paid when money is taken out of the IRA.

Also, this is for tax year 2001, which requires the IRA to be opened and deposited BEFORE April 15 and the amount would be $2K. For tax year 2002+, it goes up ($3, $3.5k for 50 and over)

You're right, I was prattling off data without thinking about the actual application.

Anyhow - given all these factors now... I decided to open a ROTH IRA instead so at least some benefit will be gained from an IRA being opened...

Yeah, not sure that will work.

New question - is it worth doing 401K if there is ZERO matching from the company? Thoughts? Thanks again everyone..


Sure, it's like a traditional IRA in its tax implications and you can do 10.5 K for 2001. It's still a tax shelter and it is deductible (since employer deducts it from the gross). The employer matching is like an added perk, its doesn't have to be there. It still lowers the tax liability. Max out the 401k if that can be afforded: great move for building wealth.

Married Filing Separately
For married persons filing separate returns, the AGI limitation is so severe as to virtually prohibit a Roth IRA contribution. For married/separate filers, the "phase-out" range is between $0 and $10,000. This means that a married/separate filer will never be able to take a full Roth IRA contribution, and when AGI rises above $10,000, no Roth IRA contribution will be allowed whatsoever.

That's correct, please check IRS publication 590 for more details.

So if around 30k was made, then it would be pointless to open a ROTH IRA then as well??? Is this true?

Yep, in this case. Are you just looking for more deductions or is this person actually planning for retirement? Both? There are other options that can be done if retirement planning is desired and contributions can be done post-tax.

Cheers !