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Old 03-18-2012, 04:45 PM
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Deduction for funding a pension plan

Hello,

My question may seem convoluted.

My wife was given the opportunity to fund previous years in her pension plan (she is a school teacher and worked under a series of one year contracts for 3 years before being hired full-time - she did not participate in the pension plan at that time). Due to an inheritance, we received oil rights this year and received a rental check for $8700 dollars. Using nearly $7000 of that income, we funded my wife's pension plan.

My question is, can we deduct the $7000 on our income taxes and if so, how do we go about doing it? We are Washington State residents, so we don't have to worry about a state tax but I could really use the deduction to offset most of the oil rights income. Hopefully this makes sense. Thank you.



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Old 03-20-2012, 06:21 AM
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“My question is, can we deduct the $7000 on our income taxes and if so, how do we go about doing it?”----> While many pension plan contributions get the benefit of being tax-deductible, not all contributions are. Contributions to a retirement plan via pre-tax contributions are NON-deductible on a tax return. Qualified pension plans are pension plans that provide tax benefits on all contributions going into the plan. These plans allow you to contribute tax deductible or pretax contributions to the plan. Examples of this type of plan are SEP and SIMPLE IRAs. These plans are ER-sponsored plans in which your ER contributes money to the plan along with you, similar to defined contribution plans like 401(k) plans. You may invest the money any way you choose according to the investments available at the financial institution managing your plan. Non-qualified plans are retirement plans, like annuities or non-qualified deferred compensation plans, that only accept non-deductible contributions. The contributions to the pension may also be made entirely by the ER. But, in either case, the pension plan contribution is funded with after-tax dollars and is not deductible.
“We are Washington State residents, so we don't have to worry about a state tax but I could really use the deduction to offset most of the oil rights income. “----->>Correct . there is no state income tax in WA state. If you can deduct the contribution( I mean you have tax deductible contribution), then yu can deduct it on your 1040.



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Old 03-20-2012, 09:31 PM
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Reply to Wnhough's Reply

I appreciate your thorough statement of the situation and I understand what you've answered but I'm not quite sure you understand our situation. Since we will be paying for the additional years of pension out of our "taxed" income (instead of pre-taxed), we should be allowed to deduct the amount paid to her pension plan, correct? And if we can, where in the 1040 form I would record this deduction? Thanks.



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Old 03-21-2012, 03:36 AM
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“Since we will be paying for the additional years of pension out of our "taxed" income (instead of pre-taxed), we should be allowed to deduct the amount paid to her pension plan, correct ?----->Frankly, I do not know which plan you have. As described previously, while many pension plan contributions get the benefit of being tax-deductible, not all contributions are. Qualified pension plans are pension plans that provide tax benefits on all contributions going into the plan. These plans allow you to contribute tax deductible or pretax contributions to the plan. Examples of this type of plan are SEP and SIMPLE IRAs. These plans are ER-sponsored plans in which your ER contributes money to the plan along with you, similar to defined contribution(benefit) plans like 401(k) plans. Contributions are income tax-free regardless of whether the contributions are made by the ER or EE. Non-qualified plans are retirement plans, like annuities or non-qualified deferred compensation plans, that only accept non-deductible contributions. , these pensions do not allow tax-free contributions. Instead, all contribution amounts are made with non-deductible tax dollars. In other words, all money contributed to the plan is after-tax money. The contributions to the pension may also be made entirely by the ER. But, in either case, the pension plan contribution is funded with after-tax dollars and is NOT deductible. The benefit of tax deductible contributions(QUALIFIED pension plans) to a pension plan is that you get more money to invest now. Because your contribution is deductible, you may end up with a larger total retirement savings at retirement. Non-deductible contributions(NON-QUALIFIED pension plan) leave you will less money to invest right now, but may provide you with more income later. This is because contributions that are taxed now won't be taxed in the future when you withdraw the money. Only the investment gains will be taxed. Even though the contributions are the same as deductible contributions, your net income may be higher than deductible plans because of this.

“And if we can, where in the 1040 form I would record this deduction?”----> No. It gives you a cost basis. When you take the funds at retirement, you won't pay quite as much in tax. If you contributed after-tax dollars to your pension or annuity, your pension payments are partially taxable. You will not pay tax on the part of the payment that represents a return of the after-tax amount you paid. This amount is your cost in the plan or investment, and includes the amounts your ER contributed that were taxable to you when contributed.So, UNLESS you are a self employer, i.e., a sole proprietor or etc, you can’t deduct contributions for yoirself on 1040. If you made contributions to your pension(qualified pension plan) fund while you were working ,as opposed to your ER's funding the entire pension, the self-funded portion of your pension isn’t taxable, and you can deduct a proportionate amount from your tax base when you calculate your AGI.However,remember that you don’t escape taxation forever, and any contributions made to a qualifying plan are taxed when you receive them. Pension payments funded entirely by an ER, or payments from pensions that you received your entire contribution in prior years, are fully taxable and not deductible when you calculate your AGI.



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