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I need some advice on the details of opening an IRA. My wife and I both work, and our combined income for '97 will (probably) be just over $100,000. Neither of us are eligble for 401(k)'s in 1997, but both of us will be in 1998. Can we both open an IRA for 1997 and deposit $2,000 each into it before taxes, or will it be a non-deductable contribution? Thanks in advance for your help.
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Sonoma wrote:
<<
I need some advice on the details of opening an IRA. My wife and I both work, and our combined income for '97 will (probably) be just over $100,000. Neither of us are eligble for 401(k)'s in 1997, but both of us will be in 1998. Can we both open an IRA for 1997 and deposit $2,000 each into it before taxes, or will it be a non-deductable contribution? Thanks in advance for your help.>>

The key to determining whether you can make a deductible contribution for 1997 is whether or not you were eligible at any point in 1997 for a 401(k) or other qualified retirement plan (the benefits offices can tell you if you are not sure). If you weren't eligible, you can make either a deductible or non-deductible contribution. If you were eligible, your 1997 contribution would have to be non-deductible.
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<<The key to determining whether you can make a deductible contribution for 1997 is whether or not you were eligible at any point in 1997 for a 401(k) or other qualified retirement plan (the benefits offices can tell you if you are not sure). If you weren't eligible, you can make either a deductible or non-deductible contribution. If you were eligible, your 1997 contribution would have to be non-deductible.>>

That's true. But it's really eligible AND participating. For example, you could be eligible for a 401k in which there is no employer contribution unless you contribute. If you don't contribute, you're not participating although you are eligible. In that case, in the absence of any other employer-provided plan, a dedcutible IRA contribution is allowed.

One other thing: The participation only has to be on one day in the tax year and it applies whether that was with the current or a former employer.

Regards....Pixy
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<<The key to determining whether you can make a deductible contribution for 1997 is whether or
not you were eligible at any point in 1997 for a 401(k) or other qualified retirement plan (the
benefits offices can tell you if you are not sure). If you weren't eligible, you can make either a
deductible or non-deductible contribution. If you were eligible, your 1997 contribution would have
to be non-deductible.>>

Can we define "eligibility" a bit better? I seem to recall reading that if your company offers a 401(k) plan, you cannot make a deductible contribution to an IRA, even if you are not currently permitted to participate in the 401(k). For example, the company may require you to be employed six months or a year before you can begin making contributions to the 401(k), so recent hires might shut out this year, but "eligible" in 1998. In this situation, does the IRS still consider you eligible for your company's retirement plan, even if the company won't let you play?

-Harry
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Greetings, Harry, and welcome.

<<Can we define "eligibility" a bit better? I seem to recall reading that if your company offers a 401(k) plan, you cannot make a deductible contribution to an IRA, even if you are not currently permitted to participate in the 401(k). For example, the company may require you to be employed six months or a year before you can begin making contributions to the 401(k), so recent hires might shut out this year, but "eligible" in 1998. In this situation, does the IRS still consider you eligible for your company's retirement plan, even if the company won't let you play?>>

Gee, I thought I did already. :-) But let's try one more time. If you must wait before you become eligible for ANY retirement plan, you are neither eligible for nor a participant in that plan. In the case you described above, assuming this person had no plan at a prior employer in 1997 and does not qualify for her current employer's plan until sometime in 1998, then she is eligible to contribute to a deductible IRA in 1997 regardless of AGI.

In 1998 she becomes eligible for the 401k. In that year and if that is the ONLY qualified plan the employer has, two issues come into play. Does the employer make a contribution on her behalf to the 401k even if she does not? If so, she is a participant in that plan. As such, her IRA contribution may or may not be deductible depending on her filing status and AGI. If she contributes to the plan herself regardless of any match from the employer, then she is also a participant and subject to AGI limits for IRA contribution deductibility. If she does NOT contribute to the 401K AND if her employer does NOT make a contribution on her behalf, she is NOT a participant. In that case, she may make a deductible IRA contribution.

I hope that's clear. Ain't this fun?

Regards.....Pixy
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