Newlyweds - Traditional IRA no longer deductible? Turbotax miscalculates my MAGI?

[David265]

My spouse is covered by a retirement plan (401K) at her workplace but I am not. I should be able to fully deduct my $6500 Traditional IRA deduction, but Turbotax says none of it is. My MAGI is well under $218,000.

When I check the forms, in the IRA (Deduction) Worksheet, I see in Line 12 Turbotax calculated my MAGI as my W2 plus my wife's W2 (plus other misc. income too small to make a difference). Is that right?? Why would my MAGI include my wife's W2 for the purposes of checking if my Traditional IRA contribution is deductible?

[dmertz · Accepted solution]

There is only one MAGI on a joint tax return and that includes the income of both spouses.  That is accommodated by spouses filing jointly having a substantially higher deduction phaseout range that do single filers.

To have separate MAGIs, the spouses would have to file separately, but then the deduction phaseout would happen between $0 and $10,000 of MAGI, so filing separately would make no sense to do.

[David265]

Thanks. Yeah, since my workplace doesn't offer a retirement plan, I end up not being to save for retirement with pre-tax income at all. It's brutal.

[Opus 17]

---

@David265 wrote:

Thanks. Yeah, since my workplace doesn't offer a retirement plan, I end up not being to save for retirement with pre-tax income at all. It's brutal.

---

The various limits are here.

https://www.irs.gov/retirement-plans/ira-deduction-limits

"brutal" is an odd choice of words.  You can still save for retirement via a Roth IRA or non-deductible contribution to a traditional IRA.  Not getting the deduction doesn't mean you lose all retirement contribution advantages, it just changes when you pay the taxes.  If you play around with the math, the difference between 

A	B
Make $1000 per month pre-tax contribution, and pay tax on all your withdrawals when you retire	Make $600 per month after-tax contribution and pay no income tax on withdrawals when you retire

is not that much in the long run, depending on what you think future tax rates will be, what state you might be living in, and so on.

[David265]

The same MAGI cap (~$220K) that makes my traditional IRA non tax-deductible also means I can't contribute to a Roth IRA.

[Opus 17]

---

@David265 wrote:

The same MAGI cap (~$220K) that makes my traditional IRA non tax-deductible also means I can't contribute to a Roth IRA.

---

You can still make contributions to a traditional IRA, you just can't deduct them.  This creates a taxable basis in the account, meaning that your investment still grows tax-free, and a percentage of the withdrawals will not be taxed when you retire.  (Suppose that, by the time you retire, your IRA balance is $500,000 and it contains $50,000 of non-deductible contributions--contributions you already paid tax on.  Since 10% of the balance was already taxed, 10% of your withdrawals will be tax-free.)

This situation is a bit more complicated, and requires more paperwork, but you can still save for retirement.  This also opens the door to a "backdoor Roth IRA", which could be the subject of a very long article by itself.

I don't love any of the online explanations, but this would get you started.

https://www.investopedia.com/retirement/should-you-contribute-nondeductible-ira/