question about 401k caps

[KTP]

My wife is very near her 401k contribution cap (I believe it is $16500 for 2009 for everyone).

I am self employed (somewhat), but really have very little income for the next few years while renovating our house and other projects.

What can we do with the extra money that will help us now in our high tax bracket?

Can I open a self directed IRA for myself and use her pre tax income to make contributions to it? Not talking Roth, because I would like to reduce our current gross income since we are fast approaching the edge of the AMT.

I don't suppose there is a way for me to also contribute $16500 to a self directed 401k if I don't have any income?

[jIM_Ohio]

Both spouses can contribute $5k to an IRA for 2009. If you hurry you could each contribute $5k for 2008 (before april 15).

If you have a HDHP (high deductable health plan) you can (as a family) defer $5950 into an HSA.

HSA and traditional IRAs are deductable. IRAs have income limits. Your limit and wife's limit will be different based on who works and how much income you make combined.

[KTP]

I am researching this now. I think her income (over 180k) will exclude her from any type of IRA, but maybe if I do not have any income or 401k myself I could still contribute to a normal IRA?

[noppenbd]

Will you report any income? That drives the decision.

If yes, I would look into SEP-IRA or individual 401k. This website describes the difference: SEP versus Individual 401k

Most likely the i-401k will let you contribute more, but will be more of a PIA. The SEP-IRA is supposed to be very easy to set up and maintain but you can only contribute 20% of your net self-employment income.

You may also be able to contribute to a traditional IRA, but because of your wife's high income won't be able to deduct the contribution at tax time (also called nondeductible IRA). However, the income limit on Roth conversions is scheduled to disappear in 2010, so next year you could do a conversion of the nondeductible IRA money to a Roth IRA with no tax consequences. The catch: if you have both pre-tax traditional IRA and nondeductible tradtional IRA monies the IRS will consider any Roth conversion as bits of both (even if the accounts are held at separate institutions).

[KTP]

Hmm...I have had income in the past years from electrical engineering contract work, but I think for the next few years I am going to finish our remodel of our house and do some major engine work on our sailboat. This means no income from me. I guess this would exclude me from any type of deductable IRA for myself? (I realize I should do my own research on this and really appreciate you taking the time to answer my questions)

[noppenbd]

No, your wife can make a spousal contribution for you to a traditional IRA, no matter what income you make together. Whether it is deductible or not will depend on your joint income, but as I said, you could later convert to a Roth, even if you cannot deduct the contribution.

See this page for a thorough discussion:
Traditional IRAs: Contributions

[KTP]

Hey thanks for the link. That had the exact answers to my questions about the IRA contributions and limits on income.

It looks like if married filing jointly (which we do) our modified adjusted gross income is less than 156,000 we can claim a full deduction on an IRA for me since I am not an active participant in any plan.

Now to figure out what modified adjusted gross income means. Is that line 38 (adjusted gross income) on the standard 1040 form?

If so, I am screwed

It is always like that...just over the range to get a stimulous check, just over the range to get a deduction. I would rather be far over the range than just a few bucks over

[noppenbd]

AGI is line 37, at the very bottom of page 1 of 1040.

The following is from fairmark.com:

To arrive at your modified AGI, start with your adjusted gross income and then add back the following items:

* Any deduction you claimed for a regular contribution to a traditional IRA.
* Any deduction you claim for student loan interest or qualified tuition and related expenses.
* Any income you excluded because of the foreign earned income exclusion.
* Any exclusion or deduction you claimed for foreign housing.
* Any interest income from series EE bonds that you were able to exclude because you paid qualified higher education expenses.
* Any employer-paid adoption expense you excluded.
* Any amount claimed as domestic production activities deduction.


Even if you are over the $156K limit, the deduction does not go away, it just phases out slowly.