How many times have you started the discussion with clients about making an annual contribution to their traditional-IRA and then had to quickly apply the brakes after you discovered or remembered that they are an active participant of an employer-sponsored retirement plan? Presented with this situation, it is wise to proceed with caution – the rules can get a bit tricky.
Clients are eligible to make a traditional-IRA contribution as long as they have earned income (including wages, salaries, amounts received for services) for the year and have not attained age of 70½ by the end of the year.
Source: §1.401(a)(9)-2, Q&A 3
However, if the client or his or her spouse is considered an active participant covered by an employer-sponsored retirement plan at work, they may not be able to deduct the IRA contribution. So if you believe this to be the case, what are some of the steps that can be taken next?
An active participant is generally someone who is participating in or receiving contributions from an employer-sponsored plan. Employer-sponsored retirement plans include: profit-sharing, 401(k), 403(b), money purchase, defined benefit plans as well as SEP-IRAs and SIMPLE IRAs. Luckily, if your client is not sure if they are covered by an employer-sponsored plan, their W-2 form from their employer has a box used to indicate whether they were covered for the year.
The following tables can be used to determine if the amount of modified AGI a client has will affect the tax deductibility of their 2012 IRA contributions.
Use this table if the client is covered by a retirement plan at work.
Use this table if the client is NOT covered by a retirement plan at work.
As you can see, the rules can get a bit tricky when a client is covered by a plan at work or if one spouse is covered and the other is not. So, if you believe your client will be phased out or partially phased out from making a deductible IRA contribution, please proceed with caution and review the information outlined above.
For more information regarding these rules, please feel free to contact the Retirement Strategies Group at (800) 722-2333, ext. 3939 or RSG@pacificlife.com.
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