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February 28, 2009

I have a client who changed jobs in February 2007. He had one month’s contribution flow into a 403(b) plan in January 2007 from his former employer’s 403 (b) plan .

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I have a client who changed jobs in February 2007. He had one month’s contribution flow into a 403(b) plan in January 2007 from his former employer’s 403 (b) plan .

I have a client who changed jobs in February 2007. He had one month’s contribution flow into a 403(b) plan in January 2007 from his former employer’s 403 (b) plan .He’s now with an employer who has a 401(k) plan. He’s eligible for the 401(k) plan but he’s not able to contribute due to top heavy restrictions. His household income will fall around $150,000 MAGI for 2007.Is he able to fund his own IRA and/or Roth for 2007 (assuming Roth income limits are met)?Is his wife able to fund her own IRA and/or Roth for 2007? (she is a stay at home mom)?They file a joint tax return.

Because he made a salary deferral contribution for the 2007 plan year, he is considered an active participant for 2007.

His wife is able to fund her traditional and/or Roth IRA based on his income.

The following applies:

Traditional IRA

He is eligible to contribute to a traditional IRA. However, his ability to deduct his traditional IRA depends on his modified adjusted gross income (MAGI) amount.

If their MAGI is $83,000 or less100% of his contribution is deductible
If their MAGI is $83,000- $103,000partial amount of his contribution is deductible. A formula must be used to determine the deductible amount
If their MAGI is $103,000 or moreNone of his  contribution is deductible

For his wife, since she is not an active participant, but is married to someone who is an active participant, the following applies to her:

If their MAGI is $156,000 or less

100% of her contribution is deductible

If their MAGI is $156,000 – $166,000

A partial amount of her contribution is deductible. A formula must be used to determine the deductible amount

If their MAGI is $166,000 or more

None of her  contribution is deductible

Roth IRA

As you know, Roth IRA contributions are nondeductible. However, their eligible to contribute to Roth IRAs depends on their MAGI.

If their MAGI is $156,000 or less

They can each contribute up to 100% of $4,000. This is increased to $5,000 for anyone who is at least age 50 by 12/31/2007

If their MAGI is $156,000 – $166,000

A partial amount of the $4,000 or $5,000 for anyone who is at least age 50 by 12/31/2007   . A formula must be used to determine the amount permissible

If their MAGI is $166,000 or more

No contribution is allowed

Tip:

If either spouse is eligible to deduct only a partial amount of his/her traditional IRA contribution, he/she may contribute that amount to the traditional IRA, and contribute the difference to his/her Roth IRA. For instance, if the deductible amount is only $1,000, the individual could contribute the $1,000 to the traditional IRA and the balance of $3,000 ($4,000- $1,000) to a Roth IRA.

On the other hand, if the individual is eligible to contribute only a partial amount to a Roth IRA, the difference could be contributed to a traditional IRA.

In sum, the maximum contribution amount ($, 4000 or $5,000 for someone who is at least age 50 by year-end) can be split between a traditional IRA and a Roth IRA. The aggregate contribution should not exceed the $4,000 or $5,000 limit.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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