I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

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Gaviotas206
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I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by Gaviotas206 » Fri Jan 26, 2018 6:29 pm

In 2017 I contributed $5,500 to a Vanguard IRA instead of my employer 403b, after learning of my employer plan's higher fees. I figured I'd get the deduction either way, so why not? But I just found out that I only can deduct about $1,000, because my income was around $70,000. I had no idea that there was an income limit to deduct the IRA - I know this is my fault for not researching thoroughly. Do I have any recourse at this point? I estimate I missed out on about $1,000 in my tax return because I didn't know this. I'm guessing I just have to call this a $1,000 lesson learned (argh!), but I thought you smart people might know something I don't know. Thank you!

Edited to add: Employer does not offer a match. I did also contribute about $3200 to the Roth 403b (employer offers both a traditional and a roth 403b) in 2017.
Last edited by Gaviotas206 on Fri Jan 26, 2018 7:18 pm, edited 3 times in total.

retiredjg
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Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by retiredjg » Fri Jan 26, 2018 6:46 pm

My understanding is that if you do not have a pension plan at work and if neither you nor your employer contributed anything to your 403b, you are not "covered" by your plan at work.

In a case like that, your entire $5,500 would be deductible.

https://www.irs.gov/retirement-plans/ar ... ement-plan

As noted in the link, your W2 will tell you if you are "covered". If you do not agree with what they put on your W2, talk to your HR department.

Gaviotas206
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Joined: Fri Jan 26, 2018 6:27 pm

Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by Gaviotas206 » Fri Jan 26, 2018 7:01 pm

Thank you for your helpful reply! I read the IRS page that you linked, and unfortunately, I am "covered" according to my W2 - I did contribute about $3200 to the Roth 403b in 2017, before I got the brilliant idea to switch for the remainder of the year to contributing to the IRA. If it matters, my employer offers both a Roth and Traditional 403b, and I only contributed to the Roth.
ETA: I learned that Box 13 is indeed correctly checked even though I only contributed to the Roth, per the IRS website: "You are an active participant if you make designated Roth contributions to a designated Roth account." https://www.irs.gov/retirement-plans/re ... ccounts#12

OldSport
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Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by OldSport » Fri Jan 26, 2018 7:42 pm

Gaviotas206 wrote:
Fri Jan 26, 2018 6:29 pm
In 2017 I contributed $5,500 to a Vanguard IRA instead of my employer 403b, after learning of my employer plan's higher fees. I figured I'd get the deduction either way, so why not? But I just found out that I only can deduct about $1,000, because my income was around $70,000. I had no idea that there was an income limit to deduct the IRA - I know this is my fault for not researching thoroughly. Do I have any recourse at this point? I estimate I missed out on about $1,000 in my tax return because I didn't know this. I'm guessing I just have to call this a $1,000 lesson learned (argh!), but I thought you smart people might know something I don't know. Thank you!

Edited to add: Employer does not offer a match. I did also contribute about $3200 to the Roth 403b (employer offers both a traditional and a roth 403b) in 2017.
Since you cannot deduct, it may be better to convert to Roth and have the earnings grow tax free.

retiredjg
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Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by retiredjg » Fri Jan 26, 2018 7:43 pm

Ok. So you are covered at work because you made the contribution. You believe this means that about $4,500 of your contribution is not deductible.

If you have no other accounts named IRA (except Roth), you could convert that $4,500 to Roth IRA instead of leaving it in tIRA as a non-deductible contribution. In fact, would just convert the entire $5,500 to Roth myself rather than have both a tIRA and a Roth IRA.

Start over this year and contribute to your 403b (almost certainly a good idea) and maybe a little to Roth IRA.

Just how high are the costs in the 403b?

Alan S.
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Location: Prescott, AZ

Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by Alan S. » Fri Jan 26, 2018 7:59 pm

How much of a gain do you have on this 2017 contribution?

Gaviotas206
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Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by Gaviotas206 » Fri Jan 26, 2018 8:11 pm

retiredjg wrote:
Fri Jan 26, 2018 7:43 pm
Ok. So you are covered at work because you made the contribution. You believe this means that about $4,500 of your contribution is not deductible.

If you have no other accounts named IRA (except Roth), you could convert that $4,500 to Roth IRA instead of leaving it in tIRA as a non-deductible contribution. In fact, would just convert the entire $5,500 to Roth myself rather than have both a tIRA and a Roth IRA.

Start over this year and contribute to your 403b (almost certainly a good idea) and maybe a little to Roth IRA.

Just how high are the costs in the 403b?
Excellent idea to convert to a Roth! I will give Vanguard a call to ask about recharacterization, and I agree that just doing the whole $5,500 makes sense. My 403b is in a T Rowe Price 2040 Retirement Fund and the expense ratio 1.24%. My IRA is in a Vanguard Target Retirement 2045 which is 0.15%, so that's why I made the switch. I'm not sure where to look for additional fees, nothing else shows up in my 403b statement at least. I feel like I barely know my way around this stuff but I'm learning!

Gaviotas206
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Joined: Fri Jan 26, 2018 6:27 pm

Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by Gaviotas206 » Fri Jan 26, 2018 8:13 pm

Alan S. wrote:
Fri Jan 26, 2018 7:59 pm
How much of a gain do you have on this 2017 contribution?
My gain was $173. I made about half the contribution in December.

Gaviotas206
Posts: 5
Joined: Fri Jan 26, 2018 6:27 pm

Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by Gaviotas206 » Fri Jan 26, 2018 8:28 pm

OldSport wrote:
Fri Jan 26, 2018 7:42 pm

Since you cannot deduct, it may be better to convert to Roth and have the earnings grow tax free.
Thank you! That seems to be the consensus - very helpful.

mega317
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Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by mega317 » Fri Jan 26, 2018 9:21 pm

retiredjg wrote:
Fri Jan 26, 2018 6:46 pm
My understanding is that if you do not have a pension plan at work and if neither you nor your employer contributed anything to your 403b, you are not "covered" by your plan
This is not relevant for the OP, and one contradicts retiredjg at one's own risk, but my reading of the IRS pubs is you are covered whether or not you choose to contribute.

retiredjg
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Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by retiredjg » Sat Jan 27, 2018 7:31 am

mega317 wrote:
Fri Jan 26, 2018 9:21 pm
retiredjg wrote:
Fri Jan 26, 2018 6:46 pm
My understanding is that if you do not have a pension plan at work and if neither you nor your employer contributed anything to your 403b, you are not "covered" by your plan
This is not relevant for the OP, and one contradicts retiredjg at one's own risk, but my reading of the IRS pubs is you are covered whether or not you choose to contribute.
Did you gather than from the link I posted above?

I read it as
  • -if any contributions made by anyone to a 401k/403b type plan or a SIMPLE or SEP IRA, or

    -eligible to participate in a defined benefit plan (often called a pension plan) whether you contribute or not
What part do you read differently?

retiredjg
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Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by retiredjg » Sat Jan 27, 2018 8:03 am

Gaviotas206 wrote:
Fri Jan 26, 2018 8:11 pm
Excellent idea to convert to a Roth! I will give Vanguard a call to ask about recharacterization, and I agree that just doing the whole $5,500 makes sense.
Are you aware that converting to Roth and recharacterizing to Roth are two different things? They will end up in close to the same amount of tax to you, but are handled on your taxes in two different ways.

Earlier I suggested a Roth conversion, but recharacterizing seems to be the better idea if you have not already finished your taxes.

If you recharacterize it, you will not pay tax on the $173 if I'm thinking about this right (pre coffee!). But that means you would have to change your taxes and NOT deduct the part you have deducted.

retiredjg
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Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by retiredjg » Sat Jan 27, 2018 8:09 am

As for your 403b...the costs are high but maybe not too high.

With no match, if all you can save is $5,500 in 2018, then putting it all into tIRA makes sense. But if you can save more, I'd fill a Roth IRA and put the rest into traditional (not Roth) 403b.

What are the lowest cost funds available in the plan? Us the ER specific to your plan, not the one you find on the retail internet.

Angelus359
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Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by Angelus359 » Sat Jan 27, 2018 8:15 am

Gaviotas206 wrote:
Fri Jan 26, 2018 8:11 pm
retiredjg wrote:
Fri Jan 26, 2018 7:43 pm
Ok. So you are covered at work because you made the contribution. You believe this means that about $4,500 of your contribution is not deductible.

If you have no other accounts named IRA (except Roth), you could convert that $4,500 to Roth IRA instead of leaving it in tIRA as a non-deductible contribution. In fact, would just convert the entire $5,500 to Roth myself rather than have both a tIRA and a Roth IRA.

Start over this year and contribute to your 403b (almost certainly a good idea) and maybe a little to Roth IRA.

Just how high are the costs in the 403b?
Excellent idea to convert to a Roth! I will give Vanguard a call to ask about recharacterization, and I agree that just doing the whole $5,500 makes sense. My 403b is in a T Rowe Price 2040 Retirement Fund and the expense ratio 1.24%. My IRA is in a Vanguard Target Retirement 2045 which is 0.15%, so that's why I made the switch. I'm not sure where to look for additional fees, nothing else shows up in my 403b statement at least. I feel like I barely know my way around this stuff but I'm learning!
Are other low cost funds available in your 403b?

1.24% sounds like lawsuit territory
IT-DevOps System Administrator

mega317
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Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by mega317 » Sat Jan 27, 2018 10:30 am

Maybe my issue is not understanding the difference between define contribution and defined benefit.

Pubs 17/590a:
Types of defined contribu-
tion plans include profit-sharing plans, stock bo-
nus plans, and money purchase pension plans.
I didn't understand that to be 403b.

Thanks for clearing me up.

Alan S.
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Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: I contributed $5,500 to an IRA instead of employer plan in 2017, found out I don't get to deduct most of it.

Post by Alan S. » Sat Jan 27, 2018 11:55 am

Gaviotas206 wrote:
Fri Jan 26, 2018 8:13 pm
Alan S. wrote:
Fri Jan 26, 2018 7:59 pm
How much of a gain do you have on this 2017 contribution?
My gain was $173. I made about half the contribution in December.
OK - assuming your 1000 permitted deduction amount is correct, the combination of actions that will save you the most are:

1) Take the deduction allowed of 1000.
2) Do a partial recharacterization - request that 4500 of your TIRA contribution be recharacterized as a Roth contribution. Since 4500 is around 82% of your 5500 contribution, then 82% of your estimated gain of 173 will be transferred to the Roth. That's around 142 that will be Roth gain and eventually tax free. There are NO current taxes due for this, and the work involved is not much different than other solutions that save you less. You will need to include an explanatory statement about the recharacterization on your 2017 return.

NOTE: If you removed the 4500 with allocated earnings, the earnings would be taxable and subject to penalty and the added income could reduce the 1000 amount you are allowed to deduct. This sets up a chain reaction transaction hassle you want to avoid. If you keep the contribution as TIRA, you will have a non deductible contribution of 4500 to report on Form 8606. The gains will eventually be taxable and therefore a non deductible contribution is inferior to a regular Roth contribution, even if you can convert since you will be taxed on the 142 of gains.

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