Question

0 Required information [The following information applies to the questions displayed below.] John (age 53 and single) has earned income of $3,300. He has $30,300 of unearned (capital gain) income. a. If he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution John can make in 2018? Maximum deductible IRA contribution

Answer 1

a. Deductible contributions to an IRA account are limited to the lesser of $5,500 or earned income in 2018. If the individual is at least 53 years old by the end of the year, he/she may make a contribution of up to the lesser of $6,500($1000 catch up contribution for taxpayers of age 50 or older)  or unearned income. In this case, John's deductible contribution is the lesser of (1) his earned income of $3,300 or (2) the maximum deductible amount of $6,500. So his deductible contribution is $3,300.

b. Taxpayers who are participants in an employer sponsored retirement plan are allowed to make deductible contributions to an IRA account as long as they meet certain AGI restrictions. In 2018, the deductibility of IRA contributions is phased-out proportionally for AGI between $189,000 and $199,000. John's AGI of $30,300 (3,300 earned income + 27,000 capital gain) falls below the $189,000 AGI phase-out threshold. Thus, John is allowed to make a contribution equal to the lesser of $6,500 or earned income (The $6,500 = $5,500 standard limit + $1,000 catch-up contribution for taxpayers age 50 and over). So, he is allowed to deduct $3,300.

c. Deductible contributions are limited to the lesser of $5,500 or earned income. The $5,500 limit is increased to $6,500 for taxpayers who have reached the age of 50 by the end of the year (taxpayers age 50 or older at the end of the year are allowed to make an additional $1,000 catch up contribution). Thus, John may make a total deductible contribution equal to the lesser of $6,500 (5,500 + 1,000) or earned income ($12,800). So, he is allowed to deduct $6,500.