Retirement question

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    Topic
  • #197267
    Oneday
    Participant

    I’m having problem understanding this problem:

    Rita Spano is an active participant in a company retirement plan. Her husband, John, age 45, works for a company that does not have a retirement plan. The Spanos’ joint adjusted gross income for 2015 is $187,000. John contributes $4,000 to an IRA for himself. How much of this $4,000 contribution for John can the Spanos deduct on their 2015 joint return?

    A.$4,000

    B.$3,200

    C.$2,000

    D.$0

    Correct answer is B

    Explanation:

    Beginning in 1998, individuals are not considered participants in a company retirement plan simply because their spouses are. However, the maximum deductible IRA contribution for a nonparticipant spouse is phased out for couples with joint return adjusted gross incomes between $183,000 and $193,000.

    Calculation for reduced IRA contribution:

    1) Modified AGI $ 187,000

    – 183,000

    2) Difference between AGI and phaseout $ 4,000

    Full contribution limit / 10,000

    3) Reduction factor 0.400

    4) Maximum contribution ($4,000 x 2) $ 8,000

    Reduction factor x 0.400

    Reduction amount $ 3,200

    My Question:

    1. I don’t understand why “Full contribution limit” is 10,000 and why we need to get that “reduction factor”. I don’t even know what that is… Not covered in Roger (this question is from Ninja MCQ). Isn’t current full contribution $5,500 per person?

    I also don’t understand why you multiply $4,000 and get “Maximum contribution” of $8,000.

    Please help!

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