IRA question

[mike74]

I'd like to know if I'm allowed to contribute to Traditional or Roth Ira.
My sibling and I own a S corporation. We are the only shareholders (50% each) and employees. For 2012 our S corp. contributed 25% (maximum allowed) of our salaries to SEP IRA account. My question is am I allowed to contribute $5000 to traditional IRA or Roth-IRA from my individual funds? Note that my aggregate gross income is around $170,000
Thanks, Mike

[kork13]

We need a little more information for an accurate answer...
- Are you single or married?
- Have you filed your 2012 taxes yet? What is your AGI (Line 38 on your 1040)?

Because your S-Corp contributed to a SEP-IRA for you (which is considered an "Employer Sponsored Plan"), you won't be eligible to use a deductible Traditional IRA. However, you CAN still use a non-deductible IRA. There are no income limits on the use of non-deductible Traditional IRAs. Thus, you can contribute $5,000 for 2012 (until April 15), and $5,500 for 2013 to a non-deductible Traditional IRA if you like.

Roth IRAs do have the income limits -- here are the limits for contributing to a Roth for 2012 & 2013.

Another option open to you would be to contribute up to the maximum in a non-deductible Traditional IRA, then convert/"recharacterize" it as a Roth IRA. There are no income limits on these Roth conversions, and are a common "back door" method of getting money into a Roth IRA if your income is above the cutoff levels.

[mike74]

Thank for the reply.
I'm married. My sibling is single and is also interested in the question. I haven't filed the 2012 taxes yet but the income is similar to last year which was approximately $170,000. My sibling's income is about the same.

[sblatner]

We are in a similar situation to you - S Corp with a 401k/profit sharing. I think the only limitations on the Roth are the income limits. I don't think coverage in another plan affects Roths. Someone correct me if I am wrong.

[kork13]

Thank for the reply.
I'm married. My sister is single and she's also interested in the question. I haven't filed the 2012 taxes yet but the income is similar to last year which was approximately $170,000. My sister's income is about the same

Ah, okay... I think I misunderstood. When you said "aggregate gross income" you meant "adjusted gross income" from the tax forms? In that case... Since you're married, and as long as your AGI for 2012 stays below $173k, you can contribute up to the 2012 maximum of $5000 into a Roth IRA for both you and your wife ($5k each, $10k total), as long as you do it before April 15. As I already said, there's no income cutoff on non-deductible Traditional IRA contributions. Alternately, I believe you could choose to use a traditional IRA for your wife, and still deduct her contributions (though not yours).

Since your sister is single, her income cutoff would start at $110k AGI to get the full $5k contribution, and she'd be limited only to a non-deductible IRA if her income is above $125k. That assumes that she is covered by an employer plan... If not, then she could deduct her traditional IRA contributions.

We are in a similar situation to you - S Corp with a 401k/profit sharing. I think the only limitations on the Roth are the income limits. I don't think coverage in another plan affects Roths. Someone correct me if I am wrong.

To my understanding, that's correct. Roth IRAs have income cutoffs, whereas Traditional IRAs are deductible vs. non-deductible based on if you are covered by an employer sponsored retirement plan (401k, 403b, TSP, SEP IRA, and so forth). The only income consideration for traditional IRAs is if one spouse is covered by an employer plan and one spouse is not (or is unemployed)... In that case, there is a limit of $173k for whether the non-covered spouse's IRA is deductible or not.

[Petunia 100]

"fluffy bathroom rug". Is the bathroom fluffy, or does fluffy describe the rug?

"non-deductible traditional IRA contribution". Is the IRA non-deductible, or does non-deductible describe the contribution?


Mike, be aware that if you contribute to a traditional IRA and then convert to a Roth, there will be some tax due, even though you will not be able to deduct your contribution. Why? Because you have deductible contributions inside your SEP. Even though it is an employer plan, it counts in the calculation. (Same is true for Simple IRAs). You don't get to convert ONLY the non-deductible contributions, you must convert a proportional share.

I'm not suggesting you shouldn't do it, I'm just saying be aware.

You're married. Is your joint AGI less than 173k for 2012?

Does your wife work? If so, does she participate in her employer's retirement plan?

[mike74]

My mistake, I thought AGI stood for aggregrate gross income, not adjusted. I now had a chance to look at my 2011 return. Turns out my AGI (line 38) was $195,000. I haven't done the 2012 taxes yet but the AGI is going to be similar. I got married in 2012. Here's another factor to consider: I think my wife and I are going to file separate tax returns. Will that affect anything?
Thanks for your help.

[Petunia 100]

My mistake, I thought AGI stood for aggregrate gross income, not adjusted. I now had a chance to look at my 2011 return. Turns out my AGI (line 38) was $195,000. I haven't done the 2012 taxes yet but the AGI is going to be similar. I got married in 2012. Here's another factor to consider: I think my wife and I are going to file separate tax returns. Will that affect anything?
Thanks for your help.

Yes and no. With MFS, the income threshold is lower. But, you're over the threshold either way, so it doesn't matter.

Looks like a "back door" Roth is your best bet. And of course, you can certainly save/invest in a taxable account. Try to keep your most tax in-efficient investments inside your SEP and Roth. Choose taxable account investments carefully.