John (age 52 and single) has earned income of $3,000. He has $33,800 of unearned

Question

John (age 52 and single) has earned income of $3,000. He has $33,800 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 2017?

b.If he does participate in an employer-sponsored plan, what is the maximum deductible IRA contribution John can make in 2017?

c.If he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution John can make in 2017 if he has earned income of $18,600?

Explanation / Answer

a.

$3,000 is the maximum available to John

Because Deductible contributions to an IRA account are limited to lower of (i) of $6,500 or earned income i.e. $3,000 (in case age of the individual age must be 50 or more other wise $5,500 or earned income. So in this case, John’s deductible contribution is the least of (1) his earned income of $3,000 or (2) the maximum deductible amount of $6,500. So his deductible contribution is $3,000.

b. $3,000 is the maximum available to John

Because 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 criteria. In 2014, the deductibility of IRA contributions is phased-out proportionally for AGI between $60,000 and $70,000. John’s AGI of $36,800 (3,000 earned income + 33,800 capital gain) falls below the $60,000 AGI phase-out threshold. Thus, John is allowed to make a contribution equal to the lesser of $6,500 or earned income since his age is 52 years . So, he is allowed to deduct $3,000.

c. $6,500 is the maximum available to John

Deduction will be least of $6,500 for taxpayers who have reached the age of 50 by the end of the year as his age is 52 or earned income ($18,600). So, he is allowed to deduct $6,500

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