Spousal IRA revisited

[redwoodreturn]

Every time I think I’m right about this, it turns out it’s not so, so here it is.

Alice works and contributes to a 401(k), while her husband Ralph has retired with a pension. Filing jointly, they would like to make a fully tax deductible contribution to Ralph’s traditional IRA.

It may come down to the definition of actively participating in an employer plan. As Alice participates actively by contributing to her defined contribution plan, modified adjusted gross income limits are to be considered; their household income is $130,000 exceeds $118,000, so she can’t deduct a contribution to her own IRA.

Looking at the household income limit of $193,000, Alice would like to deduct a contribution made to her husband's IRA. But Ralph may be an active participant in his defined benefit plan by merely receiving from it, so does that take away their hope of making a deductible contribution to a spousal IRA?

They have also looked into whether Ralph can contribute to his traditional IRA by himself, as his pension is taxable income, but it appears the income  has to come from actual work to qualify for the contribution to be tax deductible.

Thank you.

[SweetieJean]

Is this a homework question?

[TomD8 · Accepted solution]

Tom cannot contribute to his Traditional IRA by himself, because pension income is not considered earned income.

But if Tom & Alice file a joint return, only one of them has to have earned income in order to contribute to the IRA's of both.   The most that can be contributed for the year to each person's IRA is the smaller of the following two amounts:

1. $5,500 ($6,500 if you are age 50 or older), or

2. The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts.

   1. Your spouse's IRA contribution for the year to a traditional IRA.

   2. Any contributions for the year to a Roth IRA on behalf of your spouse.

This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $11,000 ($12,000 if only one of you is age 50 or older or $13,000 if both of you are age 50 or older).

Since the working spouse (Alice) is covered by a retirement plan at work, deductibility of their IRA contributions on a joint return phases out for them as described in dmertz's comment below.

https://www.irs.gov/publications/p590a/ch01.html#en_US_2015_publink1000230412

[SweetieJean]

Tom = Ralph?

[redwoodreturn]

Jackie = Ralph and Audrey = Alice.

[redwoodreturn]

Tom, I take it your answer is a yes?

[dmertz]

The deductibility of Ralph's spousal IRA contribution phases out between $184,000 and $194,000 of MAGI.  The fact that the eligible compensation used to support the contribution comes from Alice does not change that.  It's Ralph's contribution, not Alice's.

[TomD8]

Correct.  I've edited the figures in my answer.  Thank you.

[dmertz]

Ralph's phases out between $184,000 and $194,000.  Alice's phases out between $98,000 and $118,000.

[redwoodreturn]

That's what I thought too, but then I read that "The definition of active participation varies depending on the type of employer-plan. For 401(k)s and similar plans, you are generally considered an active participant if contributions/salary deferrals of any type are made to your account during the year. Pension plans, on the other hand, generally define you as an active participant if you're not specifically excluded from receiving contributions."

<a rel="nofollow" target="_blank" href="http://www.marketwatch.com/story/boost-retirement-savings-through-a-spousal-ira-2013-10-07">http://w...>

[dmertz]

This statement somewhat mangled in the Marketwatch story refers to current employees.

[redwoodreturn]

How about "If you are receiving money from a pension plan - or you contributed to a 401(k) this year, then you are still considered an active participant in a retirement plan, and as such, the deductibility of IRA contributions will phase out with increasing income levels." Surely you cannot receive money from a  pension plan if you are still a current employee?

<a rel="nofollow" target="_blank" href="https://www.brightscope.com/financial-planning/advice/question/2896/can-a-retiree-contribute-to-an-i...>

[dmertz]

CFPs get this stuff wrong all the time, as is the case with that CFP's answer.  They generally cannot be considered to be authoritative.  Trust the statement in the IRS Pub.

Also see CFR § 1.219-2(b)(1) which includes, "An individual whose compensation for the plan year ending with or within his taxable year is less than the amount necessary under the plan to accrue a benefit is not an active participant in such plan."  In other words, if the individual is not receiving any compensation from the company and is therefore not continuing to accrue benefits, the individual is not an active participant.  An individual who is no longer employed with the company and is already receiving the pension is not continuing to accrue additional benefits under the plan.

<a rel="nofollow" target="_blank" href="https://www.law.cornell.edu/cfr/text/26/1.219-2">https://www.law.cornell.edu/cfr/text/26/1.219-2</a>

[redwoodreturn]

It is beginning to dawn on me that I may have misinterpreted the term benefit used in this context. I thought it referred to the monthly pension payment for a retiree, but maybe it is really the employer's part of the contribution to the plan for an employee or something else.

[dmertz]

Receiving distributions from Ralph's pension does not make Ralph an active participant in a retirement plan for the purpose of a traditional IRA contribution.  If modified AGI is under $184,000 for 2016, Ralph's entire eligible contribution to a traditional IRA is deductible.  To be eligible, Ralph must not yet have reached age 70½ in 2016 and Alice must have at least as much in box 1 of her W-2 to support both her nondeductible traditional or Roth IRA contribution, if any, and Ralph's spousal IRA contribution.