I talked about taking some “action” in my last net worth update. We both contributed $5,000 each to a non-deductible Traditional IRA earlier this week. In doing so, I was reminded of how some folks can be intimidated by the amount of IRS fine print you must read every time you try to achieve some tax savings. Perhaps it is a small minority, especially of people reading this, but still significant.
Just to figure out if we were allowed to contribute took some searching. Per this IRS flowchart, because we are married filing jointly and will most likely have a modified adjusted gross income (MAGI) over $177,000, we are unable to contribute to a Roth IRA. How many people know what their MAGI is? In this world of spiraling credit card debt, how many people are willing to try to figure it out?
However, anyone can contribute to a Traditional IRA, even though it doesn’t explicitly state that anywhere. Then the question is whether it is tax-deductible. From this other IRS flowchart, because we are married filing jointly, covered by a retirement plan at work, and have an MAGI of over $109,000, I figure out that our contribution is not tax-deductible.
Finally, I happen to know in 2010, there is no income limit on the conversion from a Traditional IRA to Roth IRA. I must rely on the many mentions from financial media and investment brokers to know this. Even so, there are even more catches in terms of pre-tax and post-tax bits of the IRA to be converted.
I personally don’t mind all of this. But there must be a study somewhere that shows that every time a person has to walk themselves through an IRS flowchart, the overall IRA participation rate drops something like 5%.