Question

Eric, age 73, had the following items of income:

- Investment income: $60,000
- Social Security benefits: $25,000
- Interest earned: $4,000
What is the maximum contribution Eric can make to a traditional IRA in 2020?

a.) $6,000
b.) $0
c.) $7,000
d.) $4,000

Answer 1

The maximum contribution Eric can make to a traditional IRA in 2020 is $0.

Step-by-step explanation:

In order to determine the maximum contribution Eric can make to a traditional IRA in 2020, we need to consider the income limitations set by the Internal Revenue Service (IRS). For individuals who are 50 years or older, like Eric, the maximum contribution limit for a traditional IRA in 2020 is $7,000. However, this limit is subject to a reduction based on the individual's modified adjusted gross income (MAGI).

The reduction begins when an individual's MAGI exceeds a certain threshold. For 2020, the phase-out range for singles and heads of household is $65,000-$75,000 and for married couples filing jointly, it's $104,000-$124,000. Eric's MAGI is calculated by adding his investment income, social security benefits, and interest earned. Therefore, his MAGI is $60,000 + $25,000 + $4,000 = $89,000.

Since Eric's MAGI exceeds the phase-out range for singles and heads of household, his maximum contribution to a traditional IRA in 2020 would be reduced. The reduction is determined by the IRS using a specific formula. However, in Eric's case, since his MAGI is above the phase-out range, his maximum contribution to a traditional IRA in 2020 would be $0 (option b).