Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client is 67, unmarried, and receiving Social Security retirement benefits. Are Social Security benefits included in his income when determining whether he can make either a deductible IRA contribution or a Roth IRA contribution based on his income?

Answer: It depends.

If a non-married individual is an active participant in a qualified plan and if he earns less than $60,000 of modified adjusted gross income (MAGI) in 2014, he may make the full $6,500 deductible IRA contribution ($5,500 if younger than 50). If he earns more than $60,000, the deductible amount is phased out until he reaches $70,000 in MAGI, at which point he can no longer make a deductible contribution to an IRA.

Similarly, if a non-married individual earns less than $114,000 MAGI in 2014, he may make the full $6,500 Roth IRA contribution ($5,500 if younger than 50). If he earns more than $114,000, his ability to contribute to a Roth IRA is phased out until he reaches $129,000 in MAGI, at which point he can no longer make a Roth IRA contribution.

For these purposes, MAGI is adjusted gross income (AGI) plus various additions. To help calculate MAGI, the IRS provides a couple worksheets in Publication 590 at page 17 (for traditional IRAs) and page 65 (for Roth IRAs); but for most taxpayers, MAGI is simply the taxpayer’s AGI.

The general rule is that Social Security retirement benefits are not included in a taxpayer’s AGI. However, once a non-married taxpayer earns more than $25,000, up to 50% of his Social Security benefits may be includable; and once he earns more than $34,000, up to 85% of his benefits may be includable. These thresholds are higher for married taxpayers filing jointly.

Let’s say your client earns $55,000 from his employment in 2014 while also participating in his employer’s 401(k) plan. Additionally, let’s say he receives $20,000 per year from Social Security. Because of his earnings, $17,000 of his retirement benefits (85% of $20,000) is included in his AGI. Therefore, his AGI on the year is $72,000 ($55,000 from earnings + $17,000 from Social Security), and he may not make a deductible contribution to a traditional IRA in 2014.

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