I was covered by a 401k plan for partial year, can I still make a tax-deductible IRA contribution?

Answer 1

For 2006, if you are part of a retirement plan at work ("retirement plan" is checked in box 13 of at least one of your W-2s) you can still make a deductible contributions to your Traditional IRA if you are single and have an Adjusted Gross Income (AGI) less than $60,000 (phase out between $50,000 and $60,000) or if you are married and have a joint AGI less than $85,000 (phase out between $75,000 and $85,000). If you can't make a deductible Traditional IRA contribution, the next best thing is a Roth IRA. The phase out for that is $95,000 to $110,000 for single and $150,000 to $160,000 for married. If you can't do that either, the next best thing is a non-deductible Traditional IRA contribution. Be sure to fill out an 8606 if contributing any post-tax (non-deductible) money to a Traditional IRA so you don't pay tax on it again when you pull it out.

Answer 2

It depends. If you left the 401k employer during the year, you will almost certainly be subject to the reduced Modified AGI limits Taxman mentioned. an IRA contribution. That is because the deduction is denied if you are a member of a plan for even part of a plan year.

Now, if you did not work for a 401k employer and then joined later in the tax year, you may still qualify for relief based on the higher Modified AGI limits that apply to a non-participant. That is because the restriction is based on the plan year. So, if you joined a company in, say, August 2006 and their plan year is July 2006-June 2007, any IRA contribution deduction will be calculated without regard to your participation in the 401k - at least in theory!. If their plan year is the calendar year, the restrictions apply, even if you contributed to an IRA because your previous employer did not have a plan. You may then wish to recharacterize your IRA.

Frankly, having done taxes in both the UK and USA, I know which country's rules I prefer in this situation. The UK has a simpler system (still complicated, but simpler) than the myriad of rules we have in the USA. It really does need to be simplified.

Answer 3

Here is the answer from the IRS 590 publication

Table 1-2. Effect of Modified AGI 1 on Deduction If You Are Covered by a Retirement Plan at Work
If you are covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction.

IF your filing
status is ... AND your modified adjusted gross income (modified AGI)
is ... THEN you can take ...
single or
head of household $50,000 or less a full deduction.
more than $50,000
but less than $60,000 a partial deduction.
$60,000 or more no deduction.
married filing jointly or
qualifying widow(er) $70,000 or less a full deduction.
more than $70,000
but less than $80,000 a partial deduction.
$80,000 or more no deduction.
married filing separately 2 less than $10,000 a partial deduction.
$10,000 or more no deduction.


1 Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI), later.
2 If you did not live with your spouse at any time during the year, your filing status is considered Single for this purpose (therefore, your IRA deduction is determined under the “Single” filing status).

Go to the link and look at worksheet 1-2 to figure the partial deduction you are entitled to. It is somewhat convoluted as are all IRA worksheets.