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Financial Planning / Foolish 401(k)s


Subject:  Re: 401(k) contributions Date:  10/16/2002  9:40 PM
Author:  MarleysGhost Number:  15415 of 26295

Hi Joel:

On point #1, yes, you're quite correct. I should have said that the contributions represent additional money in your pocket right now. Not free money. However, I'd still rather have use of that money now than later.

On point #2, in fact you may contribute to a traditional IRA even though you contribute to a 401(k) plan. The issue is whether or not you may deduct the contribution.
Depending on your income, your 401(k)contributions may help you deduct all or part of your traditional IRA contributions.

A simple illustration: (single employee)

(sorry for the clumsy appearance)

Employee A (contributes 6%)

Gross Salary $29,000
401(k) contr (1,740)
Taxable Salary to line 7 Form 1040 $27,260

Employee B (contributes 15%)

Gross Salary $29,000
401(k) contr (4,350)
Taxable Salary to line 7 Form 1040 $24,650

Assuming no other income, and since the phaseout range for deductible contributions for a single taxpayer who is a member of an employer's plan is Adjusted Gross Income between $25,000 and $35,000 Employee B deducts all traditional IRA contributions up to $3,000 for 2002.
Employee A may only deduct 78% of any traditional IRA contributions ($7,750/$10,000). This may be a small amount, but it's the basis for my statement that your 401(k) contributions can help you max out any traditional IRA contributions.
The phaseout range is higher if your married filing a joint return.

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