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Financial Planning / Foolish 401(k)s


Subject:  Re: 401k and/or IRA Date:  10/18/2002  2:23 PM
Author:  joelcorley Number:  15434 of 26295


You wrote, In the view of the IRS it does not matter whether you actually participate or not as long as you are eligible. The fact that you are eligible for a 401k or other Qualified Defined Contribution Plna will affect your ability to deduct contribtuions to a Traditional IRA. Please refer to the excellent post (as usual) by MarkOYoung for the details. The IRS is notified of your eligiblity status each year on your Form W-2. I believe it is box 13 on the w-2 that indicates if you are eligible. Whether you participate is not a factor to the IRS.

Reference Page 12 of Publication 590. ( )

The right-hand side of this page defines the rules that govern who is covered and who is not. Even if the IRS goes by what your employer reports in box 13 of your W-2, under what condition they can report you as covered by a Qualified Defined Contribution Plan is spelled out here. To quote publication 590:

Defined contribution plan. Generally, you are covered by a defined contribution plan for a tax year if amounts are contributed or allocated to your account for the plan year that ends with or within that tax year.

Pub 590 goes on to define the difference between Defined Contribution and Defined Benefit Plans and the difference in coverage. It also points out that even an unvested employer contribution will make you covered under your employer's plan.

If neither you nor your employer contribute to your 401(k) during a plan year that ends in the current year and your employer still lists you as covered on your W-2, you should fight it. It doesn't matter what it says in the company's plan documentation because reporting you as covered violates IRS guidelines.

- Joel
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