Ask Your Tax Question. Tax Experts Answer You ASAP.

(Not a Tax Question?)

Can you have a 401K and an IRA?
Sent to Tax Experts October 11 03:52 PM

No Comment Added

Customer (name blocked for privacy)
Status:  Closed   Value: $5
Answer
October 11 4:00 PM (8 minutes and 8 seconds later)
         
REPLIEDCheck Mark

Yes, you may have both, however, your contribution to a regular IRA may not be deductible or partially deductible depending on your adjusted gross income level and whether you are considered to be an active participant.

For a defined contribution plan such as a 401(k) the Congress has defined an active particpant as; "an individual is an active participant in a defined contribution plan if employer contributions, employee contributions or forfeitures are allocated to the individual's account with respect to a plan year ending with or within the individual's taxable year. The rule applies even if the individual is not employed at any time during the taxable year."

Accordingly, the focus in testing for active participant status under a defined contribution plan is upon whether your account actually has received an allocation of contributions with respect to a plan year, rather than upon the your mere eligibility to accrue a benefit, as is the focus for defined benefit plans. Thus, an individual who elects not to participate in a defined contribution plan (i.e. a 401(k) should not be considered an active participant, unless the Company makes a contribution to your account for you.

If you are an active participant you may deduct contributions if your AGI is below certain limits depending on your filing status. For 2005 deductible IRA contributions phase out for singles with AGI between $50,000 and $60,000. For MFJ phase out is between $70,000 and $80,000. For MFS the phase out range is $0 to $10,000. Roth IRA contributions phaseout between $95,000 and $110,000 for singles and $150,000-$160,000 for MFJ. For MFS its still between $0 and $10,000.

So the bottom line in your situation is that if you elect not to participate in the 401(k) and the Company does not contribute to your account for that tax year, then you will not be an "active participant" for that tax year. Accordingly, you would not be subject to the AGI limitations for that tax year. One side note. If the Company has a defined benefit plan which will accrue a benefit for you whether you elect to participate or not and whether your benefit is vested or not, you will be an active participant.

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

Christopher Phelps -- Certified Public Accountant (CPA) -- 100% Positive Feedback on 2667 Tax Accepts
CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
Reply
October 11 4:20 PM (19 minutes and 15 seconds later)
         
Reply to Christopher Phelps's Post: I am active in a 401K, MFJ, gross income $100,000.
Can I have any IRA...Roth, perhaps?   jiddle
Customer (name blocked for privacy)
Answer
October 11 4:50 PM (30 minutes and 40 seconds later)
         
REPLIEDCheck Mark

You will be eligible to either do a Roth IRA contribution (i.e. $4K max in 2005 or $4,500 if 50 or older; phaseouts between $150k-$160k) or a non-deductible regular IRA contribution.

I typically recommend participating in the 401(k) in a sufficient enough amount to capture any employer match, then fully fund your Roth, and then if you have excess funds left put those into the 401(k) up to the limit.

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.



Edited by chris21 on October 11 2005 at 4:52 PM
Christopher Phelps -- Certified Public Accountant (CPA) -- 100% Positive Feedback on 2667 Tax Accepts
CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
Reply
October 11 4:59 PM (8 minutes and 24 seconds later)
         
Was this true for the year 2004?
Customer (name blocked for privacy)
Reply
October 11 5:03 PM (4 minutes and 33 seconds later)
         
My issue right now concerns a 2004 IRA that was
no allowed by the IRS. I am wondering if I
can convert that over to a Roth and then do the same or add to it for a $4,500 contibutionfor the year 2005? I am over 55. And I have confusing
answers from sources here. Thanks.
Customer (name blocked for privacy)
Answer
October 11 11:59 PM (6 hours and 55 minutes and 37 seconds later)
         
ACCEPTEDCheck Mark

For 2004 the IRA contribution limit was $3,000 ($3,500 if 50 or older). With the exception of MFS and Roth IRA's, all the phaseout ranges were $5,000 less (i.e. for singles phaseout between $45k and $55k).

Unfortunately, for a straight Roth contribution to be valid you need to make it by 4/15 following the applicable tax year. If your income exceeded the applicable levels then your contributions to a regular IRA would be non-deductible (i.e. you can still make the contribution, you just can't deduct it).

Unfortunately, its not as simple as pulling the money back out or reconverting. When you pull money from an IRA you have to look at all your IRA account balances. You only pull your non-deductible contributions on a ratable basis. Accordingly, if your non-deductible contributions represent 20% of your IRA balances, when you pull out your $3,000, only 20% will be considered tax-free.

You could convert some or all of your regular IRA to a Roth IRA, but your AGI needs to be less then $100k (before Roth conversion) and recognize that you may have taxable income to the extent you have made deductible contributions and earned tax-deferred income (i.e. if your non-deductible contributions represent 20% of the account, then only 20% of the conversion will be tax-free).

I do not know what you have been told but I am confident of my answer.

Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.

Christopher Phelps -- Certified Public Accountant (CPA) -- 100% Positive Feedback on 2667 Tax Accepts
CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
Reply
October 12 12:10 AM (10 minutes and 58 seconds later)
         
Reply to Christopher Phelps's Post: Excellent, Mr. Phelps. That is what I needed.
Thank you!
Customer (name blocked for privacy)
Think you can answer this question?
Login or Become an Expert

Related Answers

 

DISCLAIMER: You acknowledge that any information you may obtain from individuals you contact through use of the Just Answer service comes from those individuals, not from Just Answer!, and that Just Answer is not in any way responsible for any of the information these third parties may supply. The site and services are provided "as is" with no warranty and no representations are made regarding the qualification of an Expert. Responses and comments on Just Answer! are for general information and are not intended to substitute for informed professional advice (such as medical, legal, investment or accounting) and do not establish a professional-client relationship. Just Answer! is not intended or designed to address EMERGENCY QUESTIONS which should be directed immediately by telephone or in-person to qualified professionals. Please carefully read the Terms of Service.

Just Answer! > Income Tax