Retirement plan issue for IRA deductions

Submitted by Tony on Wed, 2015-03-25 21:58

If a spouse had a 401k during January 2014, contributed $300 and then left the company, is there any way to still make a deductible contribution to their IRAs if they made over $190k for the year? Can they take out that $300 from the 401k and still claim the IRA deductions? They didn’t have retirement plans other than that. Any thoughts on this type of situation would be appreciated.



Submitted by Alan - IRA critic on Wed, 2015-03-25 22:25

There is no solution for this and the 401k distribution will not work. As long as a taxpayer is a participant for even a single day in a year, the W-2 must show a check in the retirement plan box and that will trigger the modified AGI limits for an IRA deduction. However, with no other non Rth IRA balance, a back door Roth can become a partial solution. A Roth is always preferable to a non deductible TIRA contribution, so if any contribution is to be made at all, it must be a non deductible TIRA contribution that can then be converted to a Roth IRA tax free because there are no other IRAs to pro rate with. They end up with a Roth IRA contribution in this two step process. But no way to get a TIRA deduction. Be sure the 190k figure uses the correct calculation for modified AGI. If MAGI was 181k or less, the non covered spouse can take a TIRA deduction, and one deduction is better than none. One deduction for one spouse and a back door Roth for the other is the best combination.

Submitted by Tony on Wed, 2015-03-25 23:08

From your answer it sounds like 401k contributions aren’t even a consideration – that the availability of the retirement plan kick in those MAGI limits, regardless if anything is added to the account. Is that right? So the person would have needed to separate from service before the end of 2013. And thanks for the feedback on the 8606 and the backdoor Roth – I was leaning that direction, but was curious if there was any way to cut the 2014 tax bill instead. Long term, Roth might end up saving them more anyway.

Submitted by Alan - IRA critic on Wed, 2015-03-25 23:48

The active participant rules vary somewhat according to the type of plan the person participates in. The following is the provisions for determining 401k participation:

The individual is an active participant if the individual elects to defer compensation (make salary deferral contributions) to the to a plan If the individual is eligible to make salary deferral contributions, but declines to make such salary deferral contributions for a year, and no other contributions or forfeitures are allocated to such individual’s account for the plan year ending with or within the individual’s taxable year, the individual is not an active participant for that year.

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