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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 3375
Experience:  Over 20 Years experience
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I retired from federal government employment this year. I had

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I retired from federal government employment this year. I had been using the Federal Thrift Savings Plan to defer income, which allowed me to defer up to $22,500 per year. Now that I am retired I can no longer contribute to TSP. The yearly contribution limits for an IRA seem to be much lower.
I make a significant amount of money as a musician in addition to my pension, so I would like to defer as much income as possible. Would I have to set up a formal business entity such as an LLC in order to start a 401k plan? What other options would I have? I would prefer to avoid complicated and expensive legal/accounting procedures in setting up a plan. Thank you.

R. Klein, EA :

Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.

R. Klein, EA :

Your IRA is limited to a $5500 a year contribution or if you are over 50, then $6500 cap.

R. Klein, EA :

If you are self-employed, you may set up either a Solo-401k (single-person 401k) or use an SEP-IRA type plan. The SEP-IRA has a cap of 20% of your net earnings as self-employed while the Single 401k offered through various fund companies is a hybrid 401k/SEP plan.

R. Klein, EA :

The SEP-IRA type plans have a total contribution limit of $51K in 2014.

R. Klein, EA :

The main difference in the hybrid plan is that you can contribute $1 for each dollar earned up to the $22.5K limit, with the 20% rule kicking in after that, but the same $51K overall annual limit.

R. Klein, EA :

If you are NOT self-employed (a W-2 wage earner), you are limited to an IRA only if your firm does not offer a 401k or similar plan.

Customer:

Assuming I have more than enough self-employment income to be able to contribute more than $22,500 in a year, but less than $51,000, may I also start an IRA and contribute an additional $6500 to the IRA in the same year from my pension as long as the total contributions to the Solo 401k plan and the IRA do not exceed $51,000? Or am I precluded from contributing to an IRA if my contributions to the Solo 401k exceed $22,500? Also, I contributed a small amount to TSP this year before I retired. Does that affect my contribution limits?

R. Klein, EA :

Can I contribute to an IRA if I participate in a retirement plan at work?


You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level.


Examples



  1. child">Danny, an unmarried college student working part-time, earns $3,500 in 2013. Danny can contribute $3,500, the amount of his compensation, to his IRA for 2013. Danny’s grandmother can make the contribution on his behalf.

  2. John, 42, has both a traditional IRA and a Roth IRA and can only contribute a total of $5,500 to either one or both in 2013.

  3. Sarah, age 52, is married with no taxable compensation for 2012. She and her husband reported taxable compensation of $60,000 on their 2013 joint return. Sarah may contribute $6,500 to her IRA for 2013 ($5,500 plus an additional $1,000 contribution for age 50 and over).

R. Klein, EA :



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2014 IRA Contribution and Deduction Limits - Effect of Modified AGI on Deductible Contributions If You ARE Covered by a Retirement Plan at Work

If you are covered by a retirement plan at work, use this table to determine if your modified AGIaffects the amount of your deduction.















































If Your Filing Status Is...


And Your Modified AGI Is...Then You Can Take...
single or
head of household

$60,000 or less



a full deduction up to the amount of your contribution limit.



more than $60,000 but less than $70,000



a partial deduction.



$70,000 or more



no deduction.


married filing jointly orqualifying widow(er)

$96,000 or less



a full deduction up to the amount of your contribution limit.



more than $96,000 but less than $116,000



a partial deduction.



$116,000 or more



no deduction.


married filing separately

less than $10,000



a partial deduction .



$10,000 or more



no deduction.


If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the "single" filing status.





Customer:

If I worked only for one month at my federal job during 2013, does that mean that the rules for someone who "participates in a retirement plan at work" apply to me for 100% of my 2013 income? I was precluded from contributing the maximum yearly amount to TSP because all my TSP contributions had to come via payroll deduction?

R. Klein, EA :

Participation includes being enrolled for ONE day or more during the calendar year even if you did not put one penny in the plan.

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