Personal Finance

Money Matters: Making sense of the 2015 limits for IRA contributions

Q. Can I make a tax deductible IRA contribution of $5,000 for 2015 if I contributed to a 401(k)? What about a Roth IRA contribution? I know that won’t reduce my taxes but it seems like a good move for my future. If I can do both does that make sense and if I can only contribute to one, which would be best?

A. You have until April 18, 2016 to make a contribution to an IRA. The maximum amount you can contribute for tax year 2015 is $5,500 or $6,500 if you attained age 50 in 2015. This annual limit is aggregated for traditional and Roth IRAs. If you are under 50 years old, you could contribute $4,000 to a traditional IRA and $1,500 to a Roth IRA but the total amount cannot exceed $5,500. Generally, your IRA contribution may not exceed these limits or your taxable compensation, whichever is less. If you are married, you may be eligible to make a spousal IRA contribution based on your spouse’s taxable compensation.

If you are participating in a retirement plan at work, when your modified adjusted gross income (MAGI) exceeds $61,000 if you are filing single or head of household or $98,000 if married filing jointly or as a qualifying widow(er), your ability to deduct your contribution to a traditional IRA begins to phase out. For those filing single or head of household a partial deduction is allowed if MAGI is more than $61,000 but less than $71,000 and no deduction is allowed if MAGI is $71,000 or more. For those filing married jointly or qualifying widow(er) a partial deduction is allowed if MAGI is more than $98,000 but less than $118,000 and no deduction is allowed if MAGI is $118,000 or more.

The MAGI amounts are different if you are not participating in a retirement plan at work. A full deduction is allowed regardless of your MAGI if you are filing single or head of household. The same is true if neither you or your spouse is participating in a retirement plan at work. If married filing jointly and your spouse is participating in a retirement plan but you are not, your ability to deduct your contribution to a traditional IRA begins to phase out if your MAGI is more than $183,000 but less than $193,000 and no deduction is allowed if MAGI is $193,000 or more. As long as you have earned income you can make a non-deductible contribution regardless of MAGI.

The ability to make a Roth IRA contribution is dependent upon MAGI regardless of whether anyone is participating in a retirement plan at work. If married filing jointly and MAGI is less than $183,000 you can contribute up to the limit, the contribution amount is reduced over this amount and no contribution is allowed if MAGI is $193,000 or more. For those filing single or head of household and MAGI is less than $116,000 you can contribute up to the limit, the contribution amount is reduced over this amount and no contribution is allowed if MAGI is $131,000 or more. If your MAGI prohibits you from contributing to a Roth IRA, you may be able to make what is referred to as a “back-door” Roth IRA contribution. Basically, you make a contribution to a non-deductible IRA and then convert this to a Roth IRA. There is some controversy about this tactic and you need to be aware of the pro-rata rules so you aren’t surprised by the taxes owed on the conversion.

A meeting with a financial advisor or tax professional to help you decide which type of IRA would be best in your situation is advised.

  Comments