IRA deduction with partial year 401(k)
I have a question about IRA tax deduction. I contributed to a 401(k) during the 4 months I worked for one company in 2008. I quit in April and went to work for a company that does not have a 401(k). I contributed less than $1500 to the 401(k) while I worked for the first company. Now I want to invest more money into an IRA (I rolled over the 401(k) into an IRA).
My question is this: Can I deduct the additional amount I will put into the IRA on my 2008 taxes? Let’s say I put it another $3000. Can I deduct that amount in addition to the amount I put into the 401(k)?
Tax law says that there is a phase-out for IRA deduction if I was covered by a 401(k) plan at any time during this tax year. My AGI will be way over the phase-out amount. However, I was not employed the entire year and contributed less than $5000 into the 401(k). So, can I still deduct any additional amount or is the tax law simply unfair to the ones who quit the job early in the year? Meaning, if I only worked one day in 2008 and contributed $1 to the 401(k), it would make no sense not to allow me to contribute to the IRA and be able to deduct that amount.
Thank you.
Permalink Submitted by Alan Spross on Mon, 2008-08-11 23:36
Unfortuneately, your one day analogy is the one that applies here. Even a single dollar contributed to a 401k will result in your being considered as a retirement plan participant for the entire year. Sometimes the tax law does not provide for equitable phaseouts and applies rules on an all or nothing basis. This is one of those situations.
Your income is probably also too high for a Roth IRA contribution, but you could make a non deductible traditional IRA contribution and then convert amounts to a Roth in 2010 when the income limits for conversions disappear. Your conversion would be tax free to the extent of non deductible contribution basis in your traditional IRA accounts.
Permalink Submitted by Davor Komljenovic on Tue, 2008-08-12 03:34
Thank you for the answer. I was hoping there was a loophole in the tax law. My AGI will be too high even for the Roth IRA contribution. I will take into consideration what you suggested about conversion in 2010.
Permalink Submitted by Alan Spross on Tue, 2008-08-12 04:42
If you decide to make non deductible traditional IRA contributions, be sure to file Form 8606 with your return to report them.
Starting with 2010, even though your income may continue to be too high for regular Roth contributions, there is nothing to stop you from making the non deductible TIRA contribution and then converting to a Roth the very next day. Again, that conversion may be fully tax free if you have no other TIRA assets perhaps because you already converted them. However, if you have an employer rollover or otherwise a large pre tax amount in your TIRA, the tax free portion of each conversion is pro rated based on basis/total adjusted year end values.