PROBLEM 5 Raul and Jenna are married and are both working. They are both over ag

Question

PROBLEM 5

Raul and Jenna are married and are both working. They are both over age 50. Jenna participates in her employer's Sec. 401(k) plan and makes the maximum contribution and enjoys a company matching contribution. Raul's employer does not maintain a retirement plan so he would like to save as much as possible in a tax-advantaged manner for retirement. They expect to report $190,000 of AGI for 2016.

a. What is the maximum amount that Raul can contribute to a traditional IRA and how much can he deduct? (Show calculation)

b. What is the maximum amount that Raul can contribute to a Roth IRA and how much can he deduct? (Show calculation)

c. How could Raul contribute to both the traditional IRA and Roth IRA to maximize current and future tax savings? (Show calculation)

Explanation / Answer

Traditional IRA

1. The contribution limit for 2016 tax payer is $5,500 for tax payers under 50 years of age. For people over 50 years of age, higher annual contribution limits apply, allowing contribution upto $6,500.

Thus, Raul can contribute upto $6,500 annually in Traditional IRA, as he over 50 years of age.

Deduction:

A. If you are married filing jointly and your spouse participates in an employer-sponsored retirement plan but you do not, the same limits apply. If your income is more than $181,000 but less than $191,000, you’ll be able to take a deduction, but it will be less than the full amount. Once your income reaches $191,000 in this case, you can’t deduct any of your IRA contribution on your tax return.

B. If you’re married filing separately, the tax deduction limits are drastically lower regardless of whether you or your spouse participate in an employer-sponsored retirement plan. If your income is less than $10,000, you can take a partial deduction; once you hit $10,000, you don’t get any deduction.

Assuming, Raul & Jenna file jointly file returns, income is more than $1,81,000 but less than $1,191,000, Raul is allowed partial deduction.

Roth IRA

The contribution limit for 2016 tax payer is $5,500 for tax payers under 50 years of age. For people over 50 years of age, higher annual contribution limits apply, allowing contribution upto $6,500.

Thus, Raul can contribute upto $6,500 annually in Traditional IRA, as he over 50 years of age.

Deductions:

No, you can not deduct Roth IRA's from your income tax return that is deducted from your paycheck.. Roth IRA's are funded with after tax dollars.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.