Q. I was employed from January 2018 to June 2018 and contributed $6,050 to a company 401(k). The company matched $3,025. I was then unemployed until the end of September 2018, and I collected $8,020 of New Jersey unemployment benefits. I started a new job in late September 2018 but won’t be eligible for 401(k) until 2019. My spouse has a pension plan. Our total 2018 income will be more than $215,000. Can I contribute to a traditional IRA?
— Back on the job
A. We’re glad to hear you’re back to work – and that savings is a priority for you.
Let’s start with the general rules for IRAs.
For 2018, your total IRA contributions – including traditional and Roth IRAs – cannot be more than $5,500, or $6,500 if you’re age 50 or older, said Chadderdon O’Brien, a certified financial planner with RegentAtlantic in Morristown. You can’t contribute more than your earned income for the year if your compensation was less than the contribution limits.
Then there are rules if you have a retirement plan through work.
“As long as you have earned income, you can contribute to a traditional IRA whether or not you participate in a retirement plan through your employer,” O’Brien said. “However, you might not be able to deduct all of your traditional IRA contributions if you or your spouse are covered by a retirement plan at work, even if you are covered for only one day.”
This is a subtle but very important rule, O’Brien said.
To be clear, you are always allowed to open and fund a traditional IRA as long as you have earned income. The important point is that the level of deductibility will depend on your modified adjusted gross income (MAGI) and whether you or your spouse were covered by an employer plan at any time throughout the year, he said.
Let’s break down every scenario for a married couple that files their taxes jointly.
If you are covered by a retirement plan at work, then your MAGI must be $101,000 or less for you to take a full deduction up to the amount of your IRA contribution, O’Brien said. You will be eligible for a partial deduction if your MAGI is between $101,000 and $121,000. You will not be eligible for a deduction if your MAGI is $121,000 or more.
If you are not covered by a retirement plan at work, but you are filing jointly with a spouse who is covered by a plan at work, then your MAGI must be $189,000 or less for you to take a full deduction up to the amount of your IRA contribution, he said. You will be eligible for a partial deduction if your MAGI is between $189,000 and $199,000, and you won’t be eligible for a deduction if your MAGI is $199,000 or more.
If you and your spouse are not covered by a retirement plan at work, then you are eligible to take a full deduction up to the amount of your IRA contribution regardless of your MAGI amount.
“IRAs must be established and contributed to by the tax filing deadline – without extensions – for the tax year in which your qualifying contribution(s) will apply,” O’Brien said. “So you have until April 15, 2019 for the 2018 tax year.”
Now to your specific situation.
It appears that you have enough earned income to contribute the maximum amount to a traditional IRA in 2018, O’Brien said.
“Your total income might be above the deductibility thresholds because you and your spouse were covered by an employer plan, but you might be eligible for a deduction depending on where your MAGI stands after any deductions,” he said. “If you decide to make a 2018 IRA contribution, you have until April 15, 2019 to do so.”
As always, please consult with a tax professional so they can evaluate your specific tax situation.
Email your questions to moc.p1545138390leHye1545138390noMJN1545138390@ksA1545138390.