Traditional IRA

[globug666]

I have a partnership with my wife. She does not share in the profits, only I do.  She has a full tie job where she is coved by a 401K plan at work.  I contribute each year to my SEP based on my earnings.  I always have done my own taxes on Turbo Tax but this yer I had an odd situation with my Partnership and took it to a tax preparer.  I decided to have them prepare my personal too. Our combined income is $174,000 with her W2 and my earnings from the partnership.  Our AGI is $153,700. My wife contributed $6500 to her Traditional IRA and I am now being told she cannot take contribute that much because of our income.  I was also told she has to remove it or I we will pay a penalty.  Can you tell me if this is correct?  I do not understand why.

[dmertz · Accepted solution]

"My wife contributed $6500 to her Traditional IRA and I am now being told she cannot take contribute that much because of our income.  I was also told she has to remove it or I we will pay a penalty.  Can you tell me if this is correct?  I do not understand why."

That makes no sense.  The tax preparer is probably confusing eligibility to deduct the contribution with eligibility to make the contribution (although a tax preparer should know better).  With at least $6,500 in box 1 of your wife's Form W-2, she is certainly eligible to make a traditional IRA contribution but is not eligible to deduct the contribution due to being covered by a workplace retirement plan.

I assume that you file a joint tax return.  With MAGI being less than $218,000, your wife is eligible to make a Roth IRA contribution which would be far better than making a nondeductible traditional IRA contribution, so your wife might want to recharacterize the traditional IRA contribution to be a Roth IRA contribution instead.

[globug666]

So she is not overfunded?  Her W2 is $80K and I made $98K in the partnership.  They provided me with this below:  So we can take the deduction?

[dmertz · Accepted solution]

The IRS guidance that you are referencing just indicates that her traditional IRA contribution will not be deductible.  It doesn't prohibit making the traditional IRA contribution, the traditional IRA contribution is still permissible if not deductible.  But as I said, with MAGI being below $218,000, a Roth IRA contribution would be far preferable and can be accomplished by asking the IRA custodian to recharacterize the traditional IRA contribution to be a Roth IRA contribution instead.

[globug666]

Thank you for the clarification on that.