Apr 11, 2008

Q & A: IRA Contribution Deductibility

QUESTION: I switched jobs last year on January 16th. My previous company had a 401k plan and I contributed $76 to my 401k during that sole pay period for last year with that company. My new company does not have any retirement plan options. I opened an IRA hoping to offset some income but I'm learning that with box 13 checked on a W-2 form I can hardly contribute anything to an IRA to lessen my tax burden. So even though for 25 pay periods I was not eligible for a company provided retirement account, because I had one paycheck with a 401k contribution I can't contribute the full amount towards an IRA? Is there no sliding scale for time?

ANSWER: Unfortunately, you are subject to IRA contributions limits under this scenario. You are considered to be an active participant of an employers retirement plan if either 1) the employer makes any contributions or 2) the participant makes any elective contributions for the year. If you are filing single and an active participant, any Traditional IRA contributions begin to phase-out when modified adjusted gross income (AGI) reaches $52,000 and entirely phased-out when modified AGI reaches $62,000. For joint filers, the phase-out begins at $83,000 and is completely phased-out at $103,000.
Modified AGI is defined as Adjusted Gross Income adjusted for the following:
1) Social Security and/or Railroad Retirement benefits
2) any disallowed passive activity losses
3) deduction for qualified tuition expense and student loan interest
4) deduction for IRA contributions
5) foreign earned income and housing exclusion

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