Need help determining precisely what is meant by "covered by a retirement plan at work" for a part-timer with income from multiple sources, 99% of which is NOT covered.

[c-luxion]

Can I set up a nondeductuble IRA for my wife if she had just one day of covered employment in 2019?  We are income barred from Roth IRA contributions, so I am investigating a nondeductible traditional IRA for her and then a Roth conversion.

[dmertz · Accepted solution]

IRA accounts are not deductible or nondeductible, it's IRA contributions that are either deductible or nondeductible.

Covered by a retirement plan at work means that additions are made on behalf of the employee for the  company's retirement plan tax year ending with or within the tax year of the employee.  The employer indicates coverage by marking box 13 Retirement plan on the employee's W-2.

With sufficient compensation, anyone can make a traditional IRA contribution as long as they have not reached the year in which they reach age 70½.  The only question is whether or not the contribution is deductible, determined by a combination of modified AGI, the individual's workplace retirement coverage and the individual's spouse's workplace retirement coverage.

[macuser_22]

Covered by a retirement plan is indicated on the W-2 with a check box 13.    A check in that box means that the employer has determined that a contribution was applied to the plan either by the employee or employer for the *plan* year which can be different from a calendar year depending on the terms of the plan.   Even if covered for only one day by any employer applies to the entire year.

[c-luxion]

Thank you for the kind, thoughtful and very prompt reply.

Yes, I understand the deductible/nondeductible issue and the income limits.  My concern comes to the filing of the tax return when a single question is asked, if this is how it works, is she covered by a retirement plan at work?  For one job, yes.  For the other three, no.  As I understand it, she is not eligible to make a traditional IRA contributions if she is covered by a retirement plan at work.  I am covered by a plan at work.  Thus my question.

She has earned more than $7,000 in 2019 from employers without a plan and we are between 50 and 70.  She has earned precisely $100 from an employer with a plan (one day of substitute teaching).

I do not expect tax deductibility.  I just want to be certain she is eligible to fund a traditional IRA in 2019 with a nondeductible contribution.  If yes, then we will do this and immediately convert it to a Roth.  If not, then we wait until next year and re-evaluate.

[c-luxion]

Okay, so if I understand it correctly, her having worked one day for an employer with a retirement plan eliminates any eligibility she would otherwise have had to contribute to a traditional IRA in 2019.

[macuser_22]

---

@c-luxion wrote:

  I just want to be certain she is eligible to fund a traditional IRA in 2019 with a nondeductible contribution.  If yes, then we will do this and immediately convert it to a Roth.  If not, then we wait until next year and re-evaluate.

She has earned precisely $100 from an employer with a plan (one day of substitute teaching).

---

You can ALWAYS make a non-deductible IRA contribution as long as either spouse on a joint return has sufficient earned compensation (her own compensation is not necessary).

I would question the employer for the one day $100 W-2 with box 13 checked.   It is VERY unlikely that ANY employee or employer 401(k) contribution would have been made for one days employment and $100 of pay.   I doubt that a 401(k) plan was opened for a Substitute teacher for only one days employment.  The W-2 may well be in error.

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

[dmertz · Accepted solution]

Said another way, eligibility to contribute to a traditional IRA only depends on age and having compensation to support the contribution.  Eligibility to contribute to a traditional IRA does not depend in any way on workplace retirement plan coverage.  It's the ability to deduct that contribution that depends on workplace retirement plan coverage.

If the employer has a defined benefit plan and the employee meets the eligibility requirements for participation in the plan the employee is covered even if the employee never vests or is eligible to collect benefits under that plan.  However, it's unlikely that having only one day of employment would meet the eligibility requirements.

[c-luxion]

It is a public school system that makes such contributions automatically for every employee,  so yes that part is accurate. 

[c-luxion]

Okay.  So, I have previously misunderstood this issue, apparently.   I was under the impression that someone who was covered by a retirement plan at work was not eligible to contribute to a traditional IRA at all that year.  I'm not sure how or why I thought that at this point. 

Thank you for your time and expertise.  This is most helpful. 

[tediesel]

So what if you are already retired and collecting from both a defined benefit plan and a 401k?  Does that mean you are "covered" by an employer plan?  No W2 since not working.  But, there is earned income from doing research so that could be contributed to a Roth IRA, no matter age, right?

[dmertz]

Receiving distributions from a workplace plan does not mean that you are covered.  "Covered" means that additions are being made to the plan for your benefit.

There is no age limit for contributing to any type of IRA.

[tediesel]

Thanks!

[iOne]

Trust me, you do NOT want to make a Non-Deductible contribution to an IRA.
It's all fine until you retire, then the paperwork hassle is every year for the rest of your life.
Not worth it.  I had to do that paperwork for an elder every year for decades....
Contribute to a Roth IRA instead.