Tax Advice Santa Rosa – 401(k)s & IRAs: PHASE-OUTS & CONTRIBUTION LIMITS

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The rules about contributing to both accounts in the same year.

Will phase-outs affect your IRA contributions? Highly paid employees who contribute to workplace retirement plans can’t always maximize their IRA deductions. That is because of IRS phase-outs that kick in at certain modified adjusted gross income (MAGI) levels.

A 2011 example. This year, you could contribute up to $5,000 to a traditional or Roth IRA ($6,000 if you were 50 or older). Yet if you were covered by a retirement plan at work, your contribution to a traditional IRA was reduced if your MAGI was…

• $56,001-$66,000 for a single individual (or head of household)
• $90,001-$110,000 for a married couple filing jointly (or a qualifying widower)
• Less than $10,000 for a married individual filing a separate return

Those were the phase-outs for traditional IRAs. For Roth IRAs, the amounts differed. In 2011, phase-outs applied for Roth accounts if your MAGI was:

• $169,001-$179,000 for married couples filing jointly
• $107,001-$122,000 for singles and heads of household
• Less than $10,000 for a married individual filing a separate return

These amounts may be adjusted for inflation in 2012 and subsequent years. The current $5,000/$6,000 IRA contribution limits are not per-IRA. If you have multiple IRAs, your total IRA contributions could not exceed $5,000/$6,000 for 2011.

Some fine print to remember. Your MAGI doesn’t necessarily equal your salary. Under IRS rules, your MAGI for a particular tax year can encompass dividends, earned interest and any income realized from IRA withdrawals as well as compensation from your employer. Also, if a) you are not covered by an employer retirement plan but your spouse is, and b) you did not receive any Social Security benefits in 2011, your traditional IRA deduction for tax year 2011 may be reduced or eliminated.

If phase-outs apply, how do you know how much you can contribute? Get a copy of IRS Publication 590. Its worksheets can help you determine how much you can still deduct. If you’d like to discuss your taxes, retirement plans, and/or investments with a tax and wealth management professional, call our office at (707) 576-8700.

Your personal financial consultant – Monty