John (age 51 And Single) Has Earned Income Of $3,000

John (age 51 and single) has earned income of $3,000. He has $30,000 of unearned (capital gain) income. a. If he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution John can make in 2010? b. If he does participate in an employer-sponsored plan, what is the maximum deductible IRA contribution John can make in 2010? c. If he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution John can make in 2010 if he has earned income of $10,000? a. $3,000. Deductible contributions to an IRA account are limited to the lesser of $5,000 or earned income. If the individual is at least 50 years old by the end of the year, he/she may make a contribution of up to the lesser of $6,000 or unearned income. In this case, John's deductible contribution is the lesser of (1) his earned income of $3,000 or (2) the maximum deductible amount of $6,000. So his deductible contribution is $3,000.

b. Taxpayers who are participants in an employer sponsored retirement plan are allowed to make deductible contributions to an IRA account as long as they meet certain AGI restrictions. In 2010, the deductibility of IRA contributions is phased-out proportionally for AGI between $56,000 and $66,000. John's AGI of $33,000 (3,000 earned income + 30,000 capital gain) falls below the $56,000 AGI phase-out threshold. Thus, John is allowed to make a contribution equal to the lesser of $6,000 or earned income (The $6,000 = $5,000 standard limit + $1,000 catch-up contribution for taxpayers age 50 and over). So, he is allowed to deduct $3,000.

c. Deductible contributions are limited to the lesser of $5,000 or earned income. The $5,000 limit is increased to $6,000 for taxpayers who have reached the age of 50 by the end of the year (taxpayers age 50 or older at the end of the year are allowed to make an additional $1,000 catch up contribution). Thus, John may make a total deductible contribution equal to the lesser of $6,000 (5,000 + 1,000) or earned income ($10,000). So, he is allowed to deduct $6,000.