Participation in 401(k) and making IRA Contributions
I have a client who has not been eligible to participate in his 401(k) for the past year; he is eligible June, 2008. His jt. tax return was $95K.
He now wants to start contributions to his traditional IRA and start 401(k) in June.
Question; Is he held to the same IRA deductability rules this year as being a full year active participant in a plan, or is there some kind of pro-rated calculation?
Permalink Submitted by Denise Appleby on Tue, 2008-04-15 21:08
Good question. The IRS actually took a couple to court on that issue and the IRS won the case. The participation in the plan had been for only a short period.
To answer your question… An individual is considered an [url=http://www.retirementdictionary.com/active-participant.htm%5Dactive participant[/url]for the year, regardless of the length of participation. Therefore, whether it’s a few weeks or the entire year, the effect is the same. There is no pro-rata treatment
Permalink Submitted by Alan Spross on Tue, 2008-04-15 21:53
The 2008 phaseout range for the TIRA deduction is 85k-105k. He would therefore be in the middle of the range, however by maxing his 401k contributions after June he could probably lower his modified AGI down into the lower end of the range or possibly even come in under the range.
He could also contribute the portion he cannot deduct to a Roth IRA, which has a much higher phaseout range for joint filers. A Roth contribution is always better than a non deductible TIRA contribution. He might want to make the TIRA contribution now with the idea of recharacterizing the portion he cannot deduct next spring to a Roth.
Alternatively, he could withdraw the portion he cannot deduct with allocated earnings, leaving only the maximum allowable deduction in the TIRA. If his earnings were good on any non deductible portion, it would be better to recharacterize them to a Roth potentially tax free than to distribute them subject to tax and early withdrawal penalty.