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taxiowa

Accountant Community AllStar

02/12/12 8:40pm PST
Viewed by asker 04/07/12 7:44pm PDT

IRA contribution over 70 year old. Neat idea or illegal?

ProSeries

IRA contribution for over 70 year old is treated as non-deductible IRA and also subject to 6% penalty. But if otherwise eligible (still working), the tax savings is still significant. So the penalty is 6% but they save 15% on contribution because it reduces IRA withdrawal in current year by the amount of non-deductible contribution. Of course this also results in less SS taxed in certain cases because AGI is reduced. The only restriction I can find is they have to do it in the calendar year. If done in following year before 4/15 then non-deductible IRA basis cannot be used to offset IRA distribution in 2011.

Or am I missing something?

Solved!

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7 Replies

Charlotte256

Accountant Community AllStar

02/12/12 10:11pm PST

If he was not Seventy and one half by the end of 2011, no problem, no penalty. If he was older, your calculations are correct. It flips back to cash basis taxpayer rules if no corrected in the same tax year.

These IRAs are supposed to be for helping us old fogies, but they made the rules so complicated, that none of us is likely to remember how to keep it working correctly.

When anyone doing nothing needs help, I will gladly help that person do nothing.

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taxiowa

Accountant Community AllStar

02/13/12 6:49am PST

My point is I do not want to have client recharacterize IRA deduction if it saves them $1,000. by purposely incurring the penalty, they lower their taxable RMD from the very same IRA. This also lowers SS earnings. Bottom line is they save 1K by making non-deductible IRA as long as basis is used in same year.

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Ed79

New Member

02/13/12 7:20am PST

The solution

This will not work. If over 701/2 a contribution to a traditional IRA cannot be made even if nondeductible, and would be sublect to the 6% excess contributions penalty as you indicated. The penalty recurs for every year until the excess is removed. If not yet 701/2 a nondeductible contribution could be made, but even here tax saving on future RMDs would be minimal since basis is prorated for entire IRA with taxable amount calculated on Form 8606. You do not deduct specific basis from a distribution, it is always prorated.

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ArchieLeach

Accountant Community AllStar

02/13/12 7:27am PST

>>>The penalty recurs for every year until the excess is removed.<<< You do not deduct specific basis from a distribution, it is always prorated.<<<

Ed nailed the stingers here. Can your client do a SEP?

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taxiowa

Accountant Community AllStar

02/13/12 8:11pm PST

Thanks Ed. I should have remembered that. I had client working on last night that that made contribution in January as they always did. But he pulled everything out in November and was over 70 1/2. His IRA total was only $30,000 and was completely closed out. Program immediately gave him basis in amount of non-deduct IRA because he closed all.

That started me thinking (and drinking) that this could work for other clients. As you showed this would not be possible under normal circumstances. Thanks!

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Ed79

New Member

02/14/12 7:24am PST

Client can contribute to a Roth IRA after age 701/2 If still working with earned income. You might suggest this since earnings are tax sheltered, yet contributions can be withdrawn tax and penalty free at any time.

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taxguy623

Accountant Community AllStar

02/14/12 8:11am PST