So happy about the 401K until...

February 15, 2008 1:28 PM

Did my 401K just blow my IRA deduction out of the water?

This question is stumping my HR and my financial adviser. I was a consultant for 2007 until December. I was diligently squirreling away my monthy contribution of $333 so I would be able to deduct the max $4000 at the end of the year. However, I started a new job as a FTE and my paycheck for December enrolled me in the company 401K. When I fired up my TurboTax it said that I was unable to deduct the IRA because I was in a 401K for the year and my MAGI(?) had exceeded the allowance for that deduction. Do I have any recourse? Or do I just leave the money in the IRA as undeducted?

posted by kookywon to work & money (7 answers total)

Are you doing a traditional IRA or a Roth IRA? Roth IRA are after tax anyway, so you don't get the same immediate tax benefit that you get with a traditional IRA.
posted by 45moore45 at 1:32 PM on February 15, 2008

If you're talking about a traditional IRA, TurboTax is probably right. If you want the full details, see IRS Publication 590. Specifically, the sections Are You Covered by an Employer Plan? and Limit if Covered by Employer Plan.

Not sure what you mean by "recourse". You can leave the money in the IRA if you like; there's probably a way to take it out again, but you'd have to ask whoever runs your IRA. You may be able to open a Roth IRA and recharacterize your contributions into it -- so it's as though you did that in the first place -- again, see Pub 590 for the details.

BTW, your financial adviser ought to have been able to work this out. The IRA deduction rules are a little obscure, but it's not like they're hard to find.
posted by xil at 1:45 PM on February 15, 2008

Depends on your MAGI and your IRA type.

If you are looking at a traditional IRA, your deduction disappears at around $60K of MAGI. For a Roth, you're no longer allowed to contribute at around $100K. (you'll need to check the IRS publications for the exact limits and allowances.)

However, you are allowed to contribute to a traditional IRA on a post-tax basis. (The advantage is that the income on the IRA is still tax-advantaged) You should fill out a form 8606, since the taxes on on (eventual) withdrawals are handled differently, depending on your final pre and post-tax cost basis. TurboTax will do a 8606 for you automatically, BUT you need to keep it.
posted by printdevil at 2:04 PM on February 15, 2008

Its a traditional IRA. I'm not going to be allowed to contribute to a Roth. I'm pretty sure that turbo tax is correct about the MAGI. Looks like I'm going to have to let it sit there and hopefully remember that I've got $4000 in non deducted contributions 30 years from now. I don't want to really deal with the hassle of the gains/losses over the course of the year if I take it out and put it into something else that's non deductable.

Well, okay, sounds like that's about it?
posted by kookywon at 3:26 PM on February 15, 2008

What have the gains and losses been? Since it has been only a year, they cannot be much, and they probably work in your favor.

I would not leave it in the IRA. Since you have now established that it is non-deductible, treat it as such. Take it out and invest it in another ordinary, non-deductible account where you do not have to keep track.

Perhaps the custodian can move the investments into a non-IRA account without doing a sale which would trigger a loss/gain calculation. But don't count on it. They tend to be very skittish about anything outside of their comfort zone.
posted by yclipse at 6:03 PM on February 15, 2008

Did you get enrolled in this 401k plan without your consent or without signing some forms about it? Most 401k plan administrators would not do that, and you may be able to unwind whatever contributions you made or your employer made on your behalf if you talk to the plan administrator.
posted by iknowizbirfmark at 7:18 PM on February 15, 2008

If you elect to leave them as non-deductible, make sure you file form 8606. You should also look into converting your non-deductible IRA into a Roth in 2010 when they lift the income restriction on conversions. This is a backdoor way to get a Roth where you don't qualify and lots of people are socking away their non-deductibles in order to get this benefit in 2010. Example article
posted by Lame_username at 7:32 PM on February 15, 2008