Maximizing Traditional IRA when spouse made small contribution to employer plan.

[Mark1231]

Hi, our combined income is about $220,000 with $210,000 from my salary. My spouse had a job that paid her about $2,000 for 2020 total. She had a small retirement contribution of $184 and box 13 is checked for retirement on her w-2. We would like to maximize our traditional IRA at 7K for me (I am 50) and 6k for her (she is 45). The issue is that turbo tax is not allowing for the traditional IRA deduction because of this tiny retirement contribution. Is there a way around? Could she return the benefit and ask for a new w-2? The total cost in taxes is not small. Amounts to about $4500 in lost taxes between federal and state. 

Thank you

Mark

[macuser_22]

That depends on your MAGI on you joint tax return.    The ability to *deduct* the Traditional IRA contribution phases out at certain income amount.    The amount is different for each spouse depending on which spouse is covered by the retirement plan.

See this IRS link for Traditional IRA deduction limits when covered by a retirement plan at work.

https://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

For a 2021 contribution the phase out for the spouse covered by the plan starts at a MAGI of $105,000-$125,000 on a joint return and for the spouse not covered it starts at $198,000-$208,000.

See the publication for the full details.

The maximum IRA contributions for 2019 is $6,000, or $7,000 if you’re age 50 or older by the end of the year; or your taxable compensation for the year which ever is less.

(Taxable compensation is generally wages that you worked for - W-2 or net self-employed income minus the deductible part of the SE tax, but can include commissions, certain alimony and separate maintenance, and nontaxable combat pay ).

See IRS Pub 590A "What is compensation" for details:
https://www.irs.gov/publications/p590a#en_US_2018_publink1000230355

[dmertz]

Given the results in TurboTax, your MAGI for the purpose apparently exceeds that amount above which no deduction is permitted for a traditional IRA contribution.  There is nothing that can be done about that unless you have other above-the-line deductions that can reduce AGI.

Note that the $4,500 is not entirely lost to taxes, it just means that you are paying taxes on this $13,000 now instead of later.

[Mark1231]

Thank you. Yes, agree that its not really a loss. Now this was only a temporary Jan-March 2020 part time job ~8 hours a week for my spouse and not her main job for the year. Does this still count as retirement covered by her employer? Her main job, btw, started in September and is 23 hours a week through December 2020 and does not offer a retirement plan.

Thanks

Mark

[macuser_22]

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@Mark1231 wrote:

Thank you. Yes, agree that its not really a loss. Now this was only a temporary Jan-March 2020 part time job ~8 hours a week for my spouse and not her main job for the year. Does this still count as retirement covered by her employer? Her main job, btw, started in September and is 23 hours a week through December 2020 and does not offer a retirement plan.

Yes is does.   Covered by  a retirement plan, even if for one day, is the same as the entire year.   The IRS goes by box 13 on the W-2.