We retired last year, roughly mid-year. So for part of the year we had a qualified retirement plan (401K), and part of the year we did not. So if we contribute to an IRA, would any of those be deductible? Or they are all non-deductible because we had a 401K for part of the year?
If you are covered by a retirement plan for 1 day during the year, that’s considered coverage for the year.
Deductibility would depend on your income. From IRS Pub-590A 2021 Publication 590-A (irs.gov)
I will point out that wanting to claim only partial year coverage by a retirement plan when trying to deduct IRA contributions that came from compensation while you were covered by that plan does seem like a bit of a stretch.
AJ
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I didn’t know how it would be treated. Not trying to stretch anything, just trying to learn the rules. Not sure I would determine if the contributions came from my compensations. I had dividends, for example. It moves around from account to account as needed, so there is nothing to say that the contributions weren’t from dividends.
That said, if there is a question then I won’t do it. No need to trigger an audit flag. Thanks for the info.
Since the rule is that you must have compensation in order to make a contribution to an IRA, it is presumed that your contributions come from the compensation, even though money is fungible.
AJ
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Contributions to a Roth IRA have income limits. Traditional IRA contributions do not have income limits. If you have earned income, you may make the contribution to your IRA. But income (total income) determines to what extent if any it is deductible.
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It’s not just your income that determines deductibility, it’s also whether or not you and/or your spouse (if married) are covered by an employer’s retirement plan. For those who have no employer retirement plan coverage, there is no income limit on deductibility of IRA contributions.
AJ
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Really!!! Wow. 2023 is my first full year of retirement, so perhaps I can contribute and deduct. But I somehow recall that IRA contributions can only come from money that has had FICA paid on it (i.e. wage income)???
Two options to work around this while respecting the 401K limit.
#1, if your spouse has an IRA (without an employer plan as in a 401K or 403b), you can put up to $7,000 into that IRA (I think that’s the limit, which is probably AGI-based).
#2, if you decide to go get self-employed income, you can set up an SEP / KEOGH IRA in the same year, AND funnel up to the OVERALL annual contribution limit for ALL employer plans into that plan.
I did this 6 years ago when my long-time employer RIF’d me with 7 months of severance. When I started contracting during my severance payment period, I was legally able to bury most of it in an SEP because I was no longer allowed to contribute to the 401K.
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Beautiful! We also did the same thing when I was RIF’d and then I went on to stay in a consulting business and socked a bunch of cash away in our SEP account.
These are great for self-employed and small business owners who want to contribute as much as they can to their retirement. There’s no “company match” like my buddies who were working for the man, so I always tried to max out our SEP as best I could.
'38Packard
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Well, you would first have to meet the requirements to make an IRA contribution, the first of which is that you (or your spouse, if married) have to have compensation, aka earned income, in order to make a contribution to an IRA. From IRS Pub 590-A, here is what counts as compensation:
So unless you are still earning compensation in your retirement, you are done making IRA contributions on your income. If you are married and your spouse has compensation, then you could still contribute to an IRA, but if your spouse is covered by an employer retirement plan, there are income limits to deductibility.
AJ
I have none of these. BUT I do have some deferred compensation coming my way this year … and I think they will charge payroll taxes on it. And at some point, I will have severance pay … is that considered “wage” income?
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Specifically excluded in the right column of the image of Table 1-1 above.
It is considered wage income, but you may be considered covered by a retirement plan because you are getting severance, in which case, you would be subject to income limits for deductibility.
AJ
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Does severance usually have 401k deductions taken? I have no idea, this is my first time. If it does, I will want the maximum possible taken!
@MarkR -
I think that would be something that you would ask your employer’s HR rep. They must deal with this all the time.
Best of Luck in your retirement!
'38Packard
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It depends on your company’s severance policy and your specific package. If you have signed a severance package, pull it out and read the fine print. If you haven’t signed one yet, you should see if you can negotiate this in.
That said, even if you can’t make 401(k) contributions, that doesn’t mean that you aren’t still considered to be covered by the 401(k) plan. The fact that you aren’t sure when your severance payments will start kind of implies that you may still be considered an employee.
AJ
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