My wife is a teacher. Can she deduct IRA contributions?

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Q. I will soon be eligible to contribute to my company 401(k) but I don’t like the plan and the company match is virtually zero. My spouse is in NJEA pension plan but has no IRA or Roth. Our modified adjusted gross income (MAGI) is below $150,000. Can my wife contribute to traditional IRAs and get the tax benefits?
— Saving

A. We’re glad to see you’re thinking of your retirement.

First, let’s discuss your 401(k) plan.

Even if you don’t like the plan, we hate to see you give up free matching funds from your employer, even if the match isn’t large. Consider contributing enough to at the very least take advantage of the company match.

Then, consider that your contributions to your 401(k) will lower your taxable income, your account will grow tax-deferred and you can save far more in a 401(k) than an IRA.

For those reasons, you may want to reconsider skipping out on the plan.

Now on the deductiblity of an IRA.

If you are married filing jointly and you are covered by a retirement plan at work, your MAGI must be below $103,000 to get the full deduction, and below $123,000 to get a phased-out deduction for your contribution, said Roy Williams, a chartered financial consultant and CEO of Prestige Wealth Management in Flemington and Millburn.

If you are not covered under a retirement plan but your spouse is, your income has to be less than $193,000 to get the full deduction and under $203,000 to get any deduction, he said.

“Based on our experience with teachers in New Jersey, they are typically offered a 403b/TSA plan through work,” Williams said. “If that is the case for you wife, then the lower limits apply and you won’t get the tax deduction.”

Note that she can contribute to that plan in addition to her pension.

However, in either case, if you are over the income limits, you can still make a contribution to an IRA – you just won’t get the tax deduction, he said. But there is still a tax benefit because any growth on the contribution will grow tax-deferred until you take it out in retirement.

“This will establish basis in the IRA, for the contribution amount, you need to keep track of this so when you take money out in retirement, you don’t pay taxes on the portion of the distribution which is attributed to the contribution that you never got the deduction on in the first place,” he said.

There’s another strategy to consider.

If you do not already have an IRA, Williams said, you can make a non-deductible contribution to a traditional IRA and then immediately convert it to a Roth IRA. Then you never have to pay taxes on the amount contributed or the future growth, he said.

Email your questions to moc.p1568540058leHye1568540058noMJN1568540058@ksA1568540058.

This story was originally published on July 8, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.