Do I qualify for an IRA deduction?

Q: I hear the biggest mistake people make is not opening an IRA. I am told that as a city employee I do not qualify for an IRA deduction. Is that true? Should I open an IRA anyway? —Edward, Walpole

The following answer was provided by Barbara Damon, CPA, Edelstein & Company, LLP.

A: 'As a city employee you are in a qualified plan so you may not be able to make a deductible IRA depending on your income level. For joint return a deductible IRA can be made for the spouse in a plan if the income is under $60,000(phasing out at 70,000.) If single the income limit is $40,000(phasing out at 50,000). You can make a non deductible IRA contribution if you want to. This is a way to save for retirement but does not save taxes immediately. You can make a deduction to a Roth IRA if your income is below 95,000(phasing out at 110,000) for single and head of house and 150,00(phasing out at 160,000) for married filing joint. If your income is over these amounts you can make a nondeductible IRA.

The following answer was provided by Mark Misselbeck, CPA, Levine Katz Nannis & Solomon PC, Needham.

A: It depends on whether or not you are a participant in an employer pension plan, whether or not your contribution to an IRA can be deductible. If you participate in the city pension - an amount is credited to your account in the plan and is treated as coming from the employer - then there are strict income limits which, if exceeded, will limit or eliminate your IRA deduction. For 2003 the Adjusted Gross Income limits are:

Single - $ 40,000, with deduction gone at $ 50,000;
Joint - $ 60,000, with deduction gone at $ 70,000;
Married, Filing Separately - $ 0, with deduction gone at $ 10,000.

If one spouse is covered by a pension and the other is not, the covered spouse is subject to the limits, above, while the non-covered spouse will use $ 150,000, with deduction gone at $ 160,000.

If you'd rather do a ROTH IRA, the limits are;

Single - $ 95,000, gone at $ 110,000;
Joint - $ 150,000, gone at $ 160,000;
Married, Filing Separately - $ 0, gone at $ 10,000.

If you exceed these limits (so that you can neither do a deductible, nor a ROTH contribution), you may always make a non-deductible IRA contribution.