401K and IRA

[ChristieinMB]

Can a person in a 401k plan still contribute $4k to a traditional IRA?

[Meganator]

I don't believe so.

[PAMMELA]

It depends. Real helpful, aren't we?

[ChristieinMB]

Yeah, I'm asking for my son. I'm out of the loop on that info. What is the qualifier or nonqualifier? Income?
ETA: he (of course) wants to qualify for the tax deduction.

[scout1222]

Yes you can (I do and have for years). Whether or not you can deduct the amount of the contributions to your IRA on your taxes is a different story (I was never able to deduct them) but you still can have an IRA.

Sorry, didn't address your "what's the criteria". I don't recall off the top of my head, but have you checked around at the IRS website? I know it will be there...SOMEWHERE...but you may have tried that and found it challenging, to say the least. :D

[scout1222]

Here we go:

http://www.irs.gov/taxtopics/tc451.html

If you, your spouse, or both of you are covered by a qualified retirement plan, your IRA deduction may be reduced or eliminated, depending on the amount of your Modified Adjusted Gross Income and your filing status.

So if you have a qualified retirement plan (and if it's a 401k it probably is - but he'll want to ask to be sure) you then need to look at your income to see if you qualify for the deduction. There are links to all of that junk on the link I posted.

For me, I always made "too much" to be able to deduct anything, which is why when they created a Roth IRA I rolled everything over into that one.

If he can't deduct his contributions to a traditional IRA, he might consider a Roth IRA instead. He probably shouldn't NOT have an IRA just because there's no tax deduction now. Who knows what will be around for him when he retires!


Disclaimer: void where prohibited, your mileage may vary, I'm not a CPA, do not taunt happy fun ball, SORRY TENNESSEE!

[Grizzly]

Also not a CPA, nor do I play one on TV...

But from my own experience you can contribute to both a 401k and an IRA. There is a certain income limit for contributing to a roth IRA - I know that a married couple filing jointly that makes more than $150K annually are not eligible to contribute to a roth IRA. I am not sure what the single income is.

I believe that even above those income thresholds he could still contribute to a traditional IRA. The difference being that a roth IRA grows tax free and does not incur tax once it is withdrawn if done so at 59 1/2 >.

You can contribute up to $4K per individual to an IRA in 2006 (he can contribute to the 2006 limit until 4/15/07).

I have no idea on the deduction rules for IRAs.

[scout1222]

Yep, it's important to make a distinction between contributing to an IRA and whether or not those contributions can be deductible.

[blazedog]

What's the advantage of an IRA if there is no tax deduction - I would think one would be better off just investing the money in a normal investiment of some kind since IRA's have certain restrictions -- In the end, there is no magic to an IRA -- just a tax incentivized way to make saving for retirement more attractive.

The only thing that leaps to mind is the ability to defer capital gains taxes if you sell assets in your IRA.

Of course with a Roth, you don't pay taxes on withdrawal because you already paid to start with.

[Meganator]

Rules on Roth changed this year so that there is no upper income criteria on who may contribute - but I don't recall whether that is Roths that are inside a 401(k) or all Roths.

[scout1222]

What's the advantage of an IRA if there is no tax deduction - I would think one would be better off just investing the money in a normal investiment of some kind since IRA's have certain restrictions -- In the end, there is no magic to an IRA -- just a tax incentivized way to make saving for retirement more attractive.

Well, if I stick my money in say, a mutual fund, just to save for later (not an IRA) any capital gains/losses I'd have to report each year on my taxes. With an IRA, the gains and losses each year are irrelevant to me. So while in a cash out perspective I'm just shoving money into an account, I don't pay taxes on the income it generates each year.

[blazedog]

Well, if I stick my money in say, a mutual fund, just to save for later (not an IRA) any capital gains/losses I'd have to report each year on my taxes. With an IRA, the gains and losses each year are irrelevant to me. So while in a cash out perspective I'm just shoving money into an account, I don't pay taxes on the income it generates each year.

Yes per my original post the only benefit is the ability to defer capital gains taxes on assets held by the IRA but that may be offset by the restrictions on you ability to utilize those assets. Of course there is always the ability to invest assets in tax free bonds and enjoy tax free income -- really depends on what one's portfolio is like. :o

[Meganator]

What's the advantage of an IRA if there is no tax deduction - I would think one would be better off just investing the money in a normal investiment of some kind since IRA's have certain restrictions -- In the end, there is no magic to an IRA -- just a tax incentivized way to make saving for retirement more attractive.

The only thing that leaps to mind is the ability to defer capital gains taxes if you sell assets in your IRA.

Of course with a Roth, you don't pay taxes on withdrawal because you already paid to start with.

A lot of people will be in a lower income tax bracket in retirement than they are currently, so they will pay a lower amount of tax if they pay when they withdraw instead of now.

We have a portion of our 401(k) in Roths; it is not taxed at either end that way.