How can I change the 401k to non-deductible, so I can contribute to my IRA for 2006?

Question

My situation: I joined the company 401k plan in the mid-December 2006. Which I thought will start from beginning of 2007. However, my company started draw the money immediately and I didn't notice until I got my W2 form recently. The 401k deduction is only $769 for year 2006. I have already put money on my IRA account which I can put $5000 for 2006, I'm 50 years old. Based on the IRS rule, I could not contribute to IRA if I have 401k and have AGI more than $80000 in 2006 which I did. Is there any way that I can change the 401k contribution to non-deductible, so I can contribute to my IRA?

Answer 1

Where you eligible to defer immediately upon joining? If so, you're screwed. Even if you didn't defer, you were eligible so you'd get an X in the box stating that you were covered by a 401k plan.

Some companies may have immediate eligibility but they have monthly entry dates. That date would be the first of the month following date of hire. Check your SPD. If that's the case then your deferrals are not allowed because you are not an eligible participant. Have them pull out the deferrels as an excess contribution and issue a revised w-2 showing you as not being covered.

But, if it's immediate eligibility and immediate entry then you're out of luck. You'll have to shift the IRA contribution to non-deductible status. The reverse can't take place.

Bottom line it's all about coverage...if you were covered by the 401k then you can't use the IRA even if you chose not to contribute to the 401k.

Answer 2

There is no tax form you can use to change your 401k to an after-tax contribution. Ask your employer if they can rescind the December contribution and start your contributions in January.

From your question, it appears you made a contribution to a traditional IRA. If it is impossible for your employer to rescind the December contribution and issue you a new W-2, you can use Form 8606 to make your 2006 IRA contribution nondeductible. There is no income limit for nondeductible contributions to a traditional IRA.