Question about deductibility of Contribution to Traditional IRA


P

pixel_a_ted

My spouse is a part-time employee. She gets not benefits, does not
participate in a 401K and does not work enough hours to get any kind
of pension benefit when she retires. Based on the IRA rules and our
income, it appears that we can make a deductible IRA contribution as
long as she is "not covered by a retirement plan at work". I had
assumed that this was the case, but her employer has checked Box 13 on
the W-2 for Retirement Plan. We asked them about this and they said
yadda yadda that she's covered but not vested yadda yadda or something
to that effect.

Pub 590 says re. Defined Contribution Plans that "if an amount is
allocated to your account for a plan year, you are covered by that
plan even if you have no vested interest in (legal right to) the
account." Also, it says re. Defined Benefit Plans that "if you are
eligible to participate in your employer's defined benefit plan...you
are covered by the plan ...even if you...did not perform the minimum
service required to accrue a benefit for the year."

So I have two questions.

1) This all seems kind of ridiculous that she may be legally
considered "covered" but she has no actual coverage. Is there a way
out of this?

2) We recently made the contribution to her Traditional IRA (for
2006), thinking it was deductible. I know that we can leave it there
as a non-deductible contribution and keep track of this separately
(headache). Is there some way to "undo" the contribution (probably
another, possibly bigger headache) without involving a penalty (she is
under age 59 1/2)?

Thanks.
 
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R

Rich Carreiro

pixel_a_ted said:
1) This all seems kind of ridiculous that she may be legally
considered "covered" but she has no actual coverage. Is there a way
out of this?
No.

2) We recently made the contribution to her Traditional IRA (for
2006), thinking it was deductible. I know that we can leave it there
as a non-deductible contribution and keep track of this separately
(headache).
What headache? You fill in three lines of Form 8606 and
file it with your return.
Is there some way to "undo" the contribution (probably
another, possibly bigger headache) without involving a penalty (she is
under age 59 1/2)?
Consider recharacterizing it to a Roth contribution if your
income levels allow.
 

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