Federal Employees News Digest

Employees Have Until Tax Filing Deadline to Make 2018 IRA Contributions - Part I

Although Dec. 31, 2018 has past, employees and, if married, their spouses have until April 16, 2019 (the deadline for filing 2018 income tax returns) to make their 2018 Individual retirement arrangement (IRA) contribution. In the first of three columns discussing IRA contributions for tax year 2018, this week’s column discusses traditional IRA contribution rules.

A traditional IRA is a personal savings plan that allows an individual to accumulate money tax-deferred. Contributions to a traditional IRA may or may not be deductible depending on whether the individual (or spouse) participates in an employer-sponsored retirement plan and, if so, the amount of the individual’s modified adjusted gross income (MAGI), as will be further explained below. The earnings on a traditional IRA are taxed when they are distributed to the IRA owner. A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA.

Contribution Rules

In order to contribute to a traditional IRA for 2018, an individual must fulfill two requirements, namely: (1) the individual or the individual’s spouse must have received some type of compensation (defined below) during 2018; and (2) had to have been younger than age 70.5 throughout 2018.

Compensation includes: (1) wages, salaries, bonuses; (2) commissions; (3) self-employment income; (4) certain taxable alimony or separate maintenance payments; and (5) nontaxable combat pay. Compensation does not include: (1) income from investments; (2) pensions or annuities; (3) Social Security benefits; (4) deferred compensation; (5) rental income; (6) partnership income that is not SE income; and (7) S corporation income from Schedule K-1.

For 2018, traditional IRA contributions cannot exceed the lesser of $5,500 or compensation. Individuals age 50 or older as of Dec. 31, 2018 are allowed to contribute, up to an additional $1,000. Therefore, for employees the 2018 traditional IRA contribution limit is the lesser of $5,500/$6,500, or compensation. Note that a non-working spouse can contribute to his or her traditional IRA based on the contribution limits of the working spouse.

Traditional IRA contributions for a year can be made at any time starting on the first day of the year and ending on the due date (not including extensions) for filing the tax return for that year. This means that 2018 traditional IRA contributions must be made by April 16, 2019.

No contribution can be made to an IRA after the account owner’s death, even if the deceased had earned income before dying. Thus, a traditional IRA owner who died during 2018 could not have contributed to his or her IRA, nor can the deceased estate contribute to the deceased’s IRA.

Contributions to a traditional IRA must be made in cash. But the IRA trustee can invest the cash in investment assets including stocks, bonds, certain coins and bullions, as long as a qualified IRA trustee or custodian holds the property.

Prohibited IRA transactions include borrowing money from it, selling property to it, and using it as a security for a loan. 

Deductible Versus Nondeductible Traditional IRA

Whether a federal employee (and spouse) can deduct (as an adjustment to income) on their federal income tax return contributions made to a traditional IRA depends on the employee’s filing status, amount of modified AGI and, if married, a spouse’s retirement plan coverage status. The following table summarizes traditional IRA contribution deductibility status for 2018:

Deductibility of Traditional IRA Contribution – Federal Employees for 2018

Filing Status

Modified AGI*

Deduction

 

Single, Head of Household, Qualifying Widow

$63,000 or less

$63,001 – 72,999

$73,000 or more

Full

Partial

None

 

Married Filing Jointly (covered spouse)

$101,000 or less

$101,001 – 120,999

$121,000 or more

Full

Partial

None

 

Married Filing Jointly (noncovered spouse)

$189,000 or less

$189,001 – 198,999

$199,000 or more

Full

Partial

None

Married Filing Separately (covered or noncovered spouse)

Less than $10,000

$10,000 or more

Partial

None

*Modified AGI is AGI computed before IRA deduction + foreign earned income exclusion + foreign housing exclusion or deduction + excluded US savings bond interest + student loan interest.

IRS Publication 590-A has worksheets which will determine how much of a traditional IRA contribution is deductible. Finally, even if the contribution is limited, the traditional IRA owner can still make the maximum allowable contribution to a traditional IRA. For example, if Joan is limited to a $1,200 deductible traditional IRA deduction, then Joan can still contribute the full $5,500, or $6,500 if Joan is over age 49. The result would be an IRA deduction of $1,200 and a nondeductible IRA contribution of $4,300 ($5,300 if Joan is over 49). IRS Form 8606 is used to report nondeductible traditional IRA contributions.

Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant and IRS Enrolled Agent in Silver Spring, MD.  Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. 

 

Reader comments

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above

Contributors

Edward A. Zurndorfer Certified Financial Planner
Mike Causey Columnist
Tom Fox VP for Leadership and Innovation, Partnership for Public Service
Mathew B. Tully Legal Analyst

Free E-Newsletter

FederalDAILY

I agree to this site's Privacy Policy.

Stay Connected

Latest Forum Posts

Ask the Expert

Have a question regarding your federal employee benefits or retirement?

Submit a question