SMART Plan and Traditional IRA

[ejudgie]

After being a stay at home for 18 years, my wife is about to start a part time job at a local school.  We have been contributing money to a traditional IRA in her name over the years and taking the deduction since she is not covered by a retirement plan.  At the school they have what is called a SMART Plan (OBRA) which is sort of a retirement plan and I think she is required to contribute to it.  Can we continue to get the deduction when contributing to her IRA account or will she no longer be eligible (or will she be partially eligible)?  She really won't make all that much with this part time job and even less will be contributed to the Smart account.

[dmertz]

The SMART plan is a 457(b) defined contribution plan.  Additions made to her SMART account for a particular plan year ending with or within a particular tax year make her a participant in a workplace retirement plan for that tax year the purpose of determining whether or not contributions to a traditional IRA are deductible.  Participation in a particular tax year will be indicated by the marking of box 13 Retirement plan on her W-2.  If you are she is covered by a workplace retirement plan, whether or not a traditional IRA contribution is deductible will depend on her (your joint) AGI:

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

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-contributions

[Critter]

See these IRS IRA deduction limit charts.

If *you* are covered by a retirement plan:
https://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-i...

If you are *not* covered but your spouse is:
https://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-i...

[ejudgie]

Thanks for your reply and for the information.  That's unfortunate as it sounds like her tax deductible contribution to her IRA will now be reduced simply by working and being part of the SMART Plan.

[dmertz]

The amount she is eligible to contribute to the traditional IRA will not be changed by being covered by the workplace retirement plan, only the amount of the deduction for the contribution will potentially change.  Making nondeductible contributions might not be all that unfortunate since the money in the traditional IRA in excess of the basis in nondeductible contributions will eventually become taxable income when distributed and it's possible to find oneself having a higher marginal tax rate in the future compared to the marginal tax rate now.

If modified AGI is low enough to permit a Roth IRA contribution, it probably makes sense to make a Roth IRA contribution rather than a nondeductible traditional IRA contribution.