@SLYKTAX wrote:
Thank you Champs Opus 17 for the detail answers. I thought I can still make another max out contribution to my IRA and ROTH to reduce my AGI.
Since I have retired and with my severance payment of $70K that will only come in this year. I believe you said I can only contribute either a tax-deferred $7,000 to my traditional IRA or make a after-tax contribution to my ROTH IRA? If that is the case, I should just make a tax-deferred contribution to my traditional IRA as making a $7,000 contribution to ROTH has no immediate tax benefit. Can I also make a $7,000 contribution to my wife's ROTH as well. She is also retired.
Your IRA contribution limit is $7,000, period. You could contribute to a pre-tax IRA, a Roth IRA, or a combination, but not more than $7,000. I can't really advise you on which is best for your situation. However, I suggest a Roth IRA might be a good choice.
With $70K of gross income, your social security is already going to be taxable, and that won't be reduced with a $7,000 tax deduction. And, considering the standard deduction, which could be as high as $27,400, you are probably in the 15% tax bracket so you won't save that much. Money in a Roth IRA is not subject to RMD rules, and if you do withdraw it to spend it, it won't count as taxable income so it won't make your social security taxable.
Social security is taxable if half your social security, plus all your other taxable income, is more than $32,000. If all your retirement money was in a Roth, then your social security would be tax-free also, but if your money is in a regular IRA, taking a withdrawal will make your social security taxable so it's a double-hit. The problem is that getting regular IRA money into a Roth is also a taxable event, and figuring out when and how to do it to gain the most advantage can be very complicated. You may want to speak to a financial advisor.
Your spouse may use the spousal IRA rules to contribute up to $7000 to her own IRA, as long as you have at least $14,000 of compensation from working, which you do. If your wife is under 70-1/2, it could be contributed to a pre-tax or Roth IRA, if she is over 70-1/2, it can only be contributed to a Roth IRA.
