No. of Recommendations: 0
So I have a 401k that I stopped contributing to (my choice) at the end of 2012 but I am still employed by the company.

Can I open a ROTH and or a trad. IRA and still be eligible for the tax shelters they offer?

single, homeowner, 75k

If not, what happens when/if I fund those?

Thx Fools
Print the post Back To Top
No. of Recommendations: 0
You can open either, but you may not be allowed to deduct the tax you contribute into a traditional IRA and thus the benefit of having one may be eliminated.

You can also open an ROTH and contribute to it, up to the annual limit, as long as you are within the income limits for it or otherwise you'd have to contribute to a trad. IRA first and then convert it to a ROTH later.
Print the post Back To Top
No. of Recommendations: 1
The best source of information on IRAs and Roths is IRS Publication 590 available at the irs.gov website--

http://www.irs.gov/pub/irs-pdf/p590.pdf

It includes information on deductibility vs income on IRA accounts and income limits on Roth contributions. (The numbers change every year making it difficult for us casual users to keep current.)

If you qualify for deductible contributions IRA and Roth IRA are equally attractive. They are mathematically identical when tax rate now is identical to that in retirement. Some say IRA is better due to lower income tax rate in retirement. (IRA contributions can be deductible but are taxed at ordinary income tax rates when you take distributions in retirement. Roth contributions are after tax, but distributions are tax free in retirement.)

If you do not qualify for deductible IRA contributions, Roth is clearly better. If you exceed the income limits for Roth, IRA contributions are still allowed but some would prefer alternatives such as taxable investments in the long term buy and hold strategy. You pay taxes only when you sell and then at capital gains rates (unless you exceed the new income limitations).
Print the post Back To Top
No. of Recommendations: 2
So I have a 401k that I stopped contributing to (my choice) at the end of 2012 but I am still employed by the company.

Can I open a ROTH and or a trad. IRA and still be eligible for the tax shelters they offer?


Yes. Having a 401(k), or any other employer sponsored retirement plan, really has nothing to do with your ability to contribute to your IRA in the same year. What it can do is it may limit your ability to deduct your contribution to your traditional IRA. Here's how it works.

If nothing is contributed to your employer sponsored retirement plan for you in a given year, then you will not be an 'active participant', thus you can deduct your contribution to your traditional IRA regardless of your Adjusted Gross Income. But be careful here. You may not elect to defer any of your salary into your 401(k) plan, but the employer may make a small contribution to the plan based on either 'forfeitures' from others who left the plan prematurely and lost any unvested employer contributions or amounts the employer may use to meet non-discrimination tests for the 401(k). But if even $1 makes it into your 401(k) (or any other plan the employer sponsors), the IRS will consider you an 'active participant'. If so and you are single, then your AGI (note: not your earnings) must be less than $59,000. If your AGI is between $59,000 and $69,000, your TIRA contribution will be phased out. Above $69,000, your TIRA contribution will not be deductible. If you may not deduct your TIRA contribution and your modified AGI is less than $112,000, which it sounds like yours is, then it would make more sense to contribute to a Roth than to a non-deductible TIRA.

In addition to the above comment on a deductible TIRA vs. a Roth IRA, another difference is that with the Roth you don't have to take minimum required distributions at age 70.5....and this can be important if you get to 70.5 and you don't need the income from the IRA.

BruceM
Print the post Back To Top
No. of Recommendations: 0
.. Bruce.. Impressive. I love TMF... and you sir, are one of the reasons why.

Thank you
Print the post Back To Top
No. of Recommendations: 2
If nothing is contributed to your employer sponsored retirement plan for you in a given year, then you will not be an 'active participant', thus you can deduct your contribution to your traditional IRA regardless of your Adjusted Gross Income.

Sorry. This is not correct. When it comes to IRA deductibility, there is nothing in the rules about being an 'active participant' in a retirement plan - the rules are based on whether you are 'covered' by a retirement plan. And it only takes one day of being covered to limit your deductibility for the entire year. From IRS Pub 590 http://www.irs.gov/pub/irs-pdf/p590.pdf

Limit if Covered by Employer Plan

As discussed earlier, the deduction you can take for contributions made to your traditional IRA depends on whether you or your spouse was covered for any part of the year by an employer retirement plan. Your deduction is also affected by how much income you had and by your filing status. Your deduction may also be affected by social security benefits you received.

Reduced or no deduction. If either you or your spouse was covered by an employer retirement plan, you may be entitled to only a partial (reduced) deduction or no deduction at all, depending on your income and your filing status.


AJ
Print the post Back To Top
No. of Recommendations: 2
Please be aware that Bruce gave you incorrect information on the deductibility rules if you are eligible for an employer retirement plan. As was suggested earlier, IRS Pub 590 http://www.irs.gov/pub/irs-pdf/p590.pdf contains the rules that you need to be aware of.

AJ
Print the post Back To Top
No. of Recommendations: 0
If nothing is contributed to your employer sponsored retirement plan for you in a given year, then you will not be an 'active participant', thus you can deduct your contribution to your traditional IRA regardless of your Adjusted Gross Income.

Sorry. This is not correct. When it comes to IRA deductibility, there is nothing in the rules about being an 'active participant' in a retirement plan - the rules are based on whether you are 'covered' by a retirement plan. And it only takes one day of being covered to limit your deductibility for the entire year. From IRS Pub 590 http://www.irs.gov/pub/irs-pdf/p590.pdf


No, it is exactly correct.

Defined contribution plans (other than 457(b) or 409(A) plans), for which a contribution is made, from any source, will render the employee an 'activie pariciptant', subject to AGI phase out rules for deductibility of the employee's contributions to their traditional IRA. From IRS §219(g)(3)(B)(ii), paragraph (g) states:

(g) Limitation on deduction for active participants in certain pension plans ......,

In this context, the 'covered' rule refers to an employer's defined benefit pension plan, for which an employee is considered an active participant even if that employee elects not to participate and receives no contribution to the plan for which they are otherwise eligible.

The Retirement Dictionary summarizes this with appropriate IRS references:
http://www.retirementdictionary.com/definitions/activepartic...

BruceM
Print the post Back To Top
No. of Recommendations: 0
Bruce,

You're note regarding the Roth IRA not requiring distributions has me strongly considering changing some of my traditional 401(k) contributions to Roth 401(k) contributions. I could then roll over my Roth 401(k) to Roth IRA before the mandatory distribution begins.. My only dilemma is that I'm in the 28% bracket right now and figure I'll be lower when I am retired.

Thanks for the info. It gives me something to chew on.

Tom
Print the post Back To Top