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By: FEDweek StaffOne advantage that the Thrift Savings Plan (TSP) has over Individual Retirement Arrangements (IRAs) is that there are no income limits placed on participation in the TSP. IRAs, on the other hand do not allow individuals with income above a certain level to take advantage of all the features that are available to lower income individuals. This article discusses the IRA income limits.
Let’s look first at traditional IRAs. The only requirement for participation in a traditional IRA is that you must have earned income.
The traditional deductible IRA has been around since 1974 and has the following features:
• Contributions are deductible from your federal income tax.
• The money in the IRA grows tax-deferred.
• When the money is withdrawn, all of it is taxed as ordinary income.
• There is a 10% early withdrawal penalty for money taken out before 59 ½, although the penalty can be avoided by following a life-expectancy based withdrawal strategy for the longer of five years or until you reach the age of 59 ½.
• The same 50% penalty for failing to take a required minimum distribution after reaching 72 that applies to the TSP, applies to a traditional deductible IRA.
But here come the income restrictions. There are income limits on deducting your contributions to a traditional deductible IRA if you belong to a retirement plan at work. Of course, as federal employees, we all belong to a retirement plan through work.
Single filing status
– Full deduction allowed if income is below $66,000
– Partial deduction allowed if income is between $66,000 and $76,000
– No deduction allowed if income is over $76,000
Joint filing status if spouse also belongs to a retirement plan at work
– Full deduction allowed if income is below $105,000
– Partial deduction allowed if income is between $105,000 and $125,000
– No deduction allowed if income is over $125,000
Joint filing status if spouse does not belong to a retirement plan at work
– Full deduction allowed if income is below $198,000
– Partial deduction allowed if income is between $198,000 and $208,000
– No deduction allowed if income is over $208,000
You’re still allowed to contribute to a traditional IRA if your income is above the upper limits, you just cannot deduct those contributions from your federal income taxes.
In addition to the traditional IRA, we have the Roth IRA which has been around since 1997. Like with a traditional IRA, to contribute to a Roth IRA you must have earned income. Roth features are:
• Contributions are from already taxed dollars.
• Earnings are tax free if you make qualified withdrawals. In order for a withdrawal to be considered qualified: The account must have been open for at least five years; and you must be at least age 59 ½.
• There is a 10% early withdrawal penalty for any earnings taken out before 59 ½. And you are always viewed as taking your contributions out first.
• Minimum distributions are not required.
But wait! If your income is too high you can’t even contribute a Roth IRA.
Single filing status
– Full contribution allowed if income is below $125,000
– Partial contribution allowed if income is between $125,000 and $140,000
– No contribution allowed if income is over $140,000
Joint filing status
– Full contribution allowed if income is below $198,000
– Partial contribution allowed if income is between $198,000 and $208,000
– No contribution allowed if income is over $208,000
Note that in both IRAs above there is a phase-out of contributions. If you fall into a situation where your income is between the low end (e.g., $125,000 for single filing status for a Roth) and the high end (e.g., $140,000 for single filing status for a Roth), you will get a partial contribution (Roth) or a partial deduction (traditional). The IRS gives helpful advice as to how to calculate a partial contribution/deduction in publication 590A, Contributions to Individual Retirement Arrangements.
