Pre-tax IRAs

Contribution Limit

The contribution limit for both 2009 and 2010 are the lesser of qualifying income or $5,000.  Qualifying income is defined as earned income reported on W-2, self-employment income or alimony; or Spouses qualifying income over and above amount considered for spouse’s IRA.  Individuals who are age 70½ or older by the end of the applicable tax year are not eligible.

The catch-up contribution limit, for individuals who are age 50 or will become age 50 at anytime within the tax year (even if you turn 50 on December 31) for both 2009 and 2010, is $1,000.

Is the contribution deductible? 

Yes, if…  an individual tax payer is not an “active” participant in a qualified plan.  An individual tax payer is not active if he/she:

1) does not participate in an employer plan; or

2) participates in a SEP or Profit Sharing/401(k) and there’s no “cash basis” employer or employee contribution (and no forfeiture allocation) in the applicable tax year.

Maybe if…  an individual is an active plan participant and qualifying income is:

Pre-tax IRA Chart2

For 2010, the “married joint filer and spouse not active” income limit increases to $167,000 up from $166,000.

All tax payers, including those who are “active” with qualifying income exceeding the deduction limits above, are eligible to contribute to a nondeductible IRA

Planning Tips  Employer A is an S corporation that reports taxes on a calendar year basis who sponsors a Profit Sharing Plan (without a 401(k) feature).  There are no contributions funded during calendar year 2009 (and no forfeitures are allocated).  However, Employer A takes a deduction on his/her 2009 corporate tax return for an employer contribution that is funded by the due date of the employer return (March 15) or any extension thereof (September 15).  This means that the participants in Employer A’s plan are not “active” for the 2009 tax year; therefore, they can make deductible contributions to an IRA for 2009.

The same outcome is achieved in the first year that an employer establishes a new SEP or profit sharing plan and does not fund the contribution until the following tax year.  In this context, the employer does not need to establish the SEP until the due date of the employer’s tax return (or any extension thereof).  However, the employer must establish a profit plan prior to the end of the applicable tax year.  This means that the plan must be adopted by the employer by signing the plan documents (and board minutes if applicable); however, there is no requirement to fund the plan prior to the tax year end).

Pre-tax IRA Distributions

A withdrawal from a Pre-tax IRA is taxed as ordinary income subject to a 10% additional penalty tax, unless it’s distributed to the IRA owner:

  • after he/she attains age 59½
  • if he/she is totally or permanently disabled
  • if he/she is unemployed and unable to pay health insurance premiums
  • for payment of college expenses for him/herself, his/her spouse or dependents
  • compliant with the rules for first-time home buyers
  • for payment of medical expenses in excess of 7.5% of AGI
  • to satisfy an IRS levy against a retirement account
  • compliant w/rules for a series of substantial equal periodic payments

The 10% additional penalty tax also does not apply if the withdrawal is:

  • distributed to a beneficiary post the death of the IRA owner
  • distributed (or directly transferred) to another retirement account
  • Rolled over to another retirement account within 60 days compliant with applicable rules

Required Minimum Distributions (RMDs)

Individuals are required to take minimum distributions in accordance with applicable rules from all pre-tax and nondeductible IRAs upon attainment of age 70½.

Copyright © 2009 Barry R. Milberg   All Rights Reserved

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