Deductions for IRAs are limited by income By: Karen Lazarovic

Women & money

March 27, 1991|By Columbia Features Inc.

Q. Together, my husband and I earn $42,000 a year and I have a 401(k) plan at work that I contribute to for my retirement. We would still like to put away money in an IRA account. At our income level, would our IRA contributions be tax deductible?

A. All wage earners under age 70 1/2 are eligible to contribute to an IRA. Married couples can contribute up to $4,000 a year or $2,000 each. If neither you nor your spouse were covered by a retirement plan at work, your IRA contributions would be tax deductible regardless of your income level.

However, once one spouse is covered by a tax-qualified retirement plan at work, deductibility of an IRA becomes subject to certain income limits. For married couples, the income limit to qualify for full deductibility of their IRAs is an adjusted gross income of $39,999. From $40,000 to $49,999, the deduction is reduced by $10 for every $50 over $40,000.

In your case, at $42,000 (if there are no adjustments to your income such as alimony paid) you would reduce your IRA deduction by $400. In my estimation, it would still be beneficial for you to contribute to your IRAs.

By the way, under current law if your joint earnings were to rise above $50,000, their would be no tax deduction for your IRAs.

Q. At work, there is a 401(k) plan, but I am not participating in it because I do not want to have money held out of my salary each week for retirement, which won't be until 40 years from now. Instead, I would like to put whatever I can into an IRA each year.

If I make $28,000 a year, can I deduct my IRA contribution? I am single.

A. Even though you don't contribute to your 401(k) plan, you are still considered an "active participant" under IRS guidelines because the pension plan is offered to you and you are eligible to participate.

Therefore, your IRA deduction becomes subject to income limits. For a single person, there is full IRA deductibility on earnings up to $24,999. Between $25,000 and $34,999, the deduction is reduced by $10 for every $50 over $25,000.

If your adjusted gross income is $28,000, your IRA deduction would be reduced by $600.

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