Module 3 & 4.docx

# This is the same phase out limit in place for roth

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available the full deductible contribution of \$5,500 if their AGI is below \$189,000 (2018 limit). This is the same phase out limit in place for Roth IRA contributions. Phase out begins at \$189,000 and all deductible contribution is phased out at \$199,000. This is a narrower window of opportunity (\$10,000 instead of the \$20,000 window) than if both people are active participants, but the lower bound is now \$189,000 instead of \$101,000. Of course, taxpayers are always able to make non-deductible contributions if they do not meet the AGI limits for deductible contribution Q: Which person (people) below is (are) considered an "active participant" for 2018? (select all that apply) A: Tim is covered by a 401(k) at work and he contributed January - March of 2018 Q: John and Stacey just celebrated their 5th wedding anniversary. They are earning a combined \$75,000 and they are both covered by 401(k)s at work. How much could they each contribute to a Traditional IRA? A: \$5,500. They are married and the limit is \$121,000 for 2018. It does not matter the source of the contributed funds as long as they have earned income in excess of the contributed amount. Q: John and Stacey just celebrated their 5th wedding anniversary. They are earning a combined \$117,500 and they are both covered by 401(k)s at work. How much could they each contribute to a Traditional IRA? A: \$962.50. They are married and the limit is \$121,000 for 2018. They use the pro-rata calculation method as shown below to determin their allowable deductible contribution since they are in the phase- out window. \$962.50 = \$5,500 - (\$5,500 X [\$117,500-\$101,000 / 121,000 - 101,000]) Roth IRAs in More Detail In contrast to a traditional IRA, Roth IRAs do permit taxpayers to contribute after their 70 ½ birthday . In order to contribute, a taxpayer will need to have earned income. The spousal IRA concept previously discussed with traditional IRAs will also apply to Roth IRAs as well. Unlike the traditional IRA where AGI limits only apply if the taxpayer is also an active participant, Roth IRA contribution eligibility is strictly based upon AGI limits even for those who are not active participants. In the table below, you can see the current AGI limit schedule for all Roth contributions.

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Someone who is married and filing a joint tax return can contribute the full \$5,500 if their income is below \$189,000, and the phase out range ends if they earn above \$199,000. Notice that this is the same range that we discussed in the last section for someone who is a non-working spouse of an active participant. You can calculate the allowable deductible contribution in the same way that you already learned for the traditional IRAs in the last section. In Module 5: Lesson 6 you will learn about specific distribution rules for traditional IRAs, but the short version is that a certain amount of distribution is mandatory from a traditional IRA. One benefit of the Roth IRA is that there is not a mandatory distribution amount. Taxpayers can deposit money into a Roth IRA and never touch it until it is inherited by their heirs. When a Roth IRA becomes a Beneficiary Roth IRA , the story changes. The owner through inheritance will need to withdraw the money out of the Roth IRA (no longer receiving the favorable tax-free compounding) either within 5 years or they can establish
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• Spring '14
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