Traditional IRA Questions

[milb]

Hi Everyone,

I have a couple of questions I would like to confirm after doing some research here.

I just graduated school and did not enrol in my companies 401(k) this year as there was no matching, high fees (negotiated change on all fronts for 2017) and also to build up my emergency fund. My income is going to be higher than the IRA deduction limit, but since I have not enrolled in this 401(k) even though it is offered, can I still make the full deduction for my $5,500 contribution from taxes?

I also just wanted to confirm that a tIRA contribution does not reduce MAGI and only the 401(k) contribution does? Just so I can gauge how much of a 401(k) contribution I need to make incase my above understanding is incorrect.

Thanks!

[secondcor521]

I believe you are incorrect on both counts.

If you are covered by a retirement plan at work, then your ability to deduct a traditional IRA contribution is dependent on your filing status and income.  If, for example, you are filing single and make more than $71K, you would not be able to deduct your traditional IRA contribution.  Whether or not you participate or not is irrelevant; what matters is whether you have a plan in which you could enroll.  See here for the details for this year:  https://www.irs.gov/retirement-plans/plan-participant-employee/2016-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work.

On your second question, if you make a contribution to a traditional IRA and are eligible to deduct it (see previous paragraph) and you choose to deduct it (*), then it would reduce your MAGI.  Traditional IRA contributions are an adjustment to income on line 32, and MAGI is calculated from AGI, which is line 37 on form 1040.

(*) It is possible to contribute to a traditional IRA and not deduct it, in which case it would have no effect on your MAGI.  However, most often people in that situation would just contribute to a Roth IRA instead.

[milb]

Okay thanks.

I guess that the quality of this research shows that it was late night iPhone browsing!

I completely agree with the second answer, it is what I previously believed but thought I read something different on an old thread here, but than again the late night small screen probably affected my understanding.

I am still unsure on the first one given these two articles

https://www.irs.gov/retirement-plans/are-you-covered-by-an-employers-retirement-plan

http://www.investopedia.com/articles/retirement/05/032305.asp

Particularly the second link in being an active participant of the plan, I did find an old thread where I believed someone specifically mentioned regardless if it is an option, if you do not contribute in that tax year than that is not being covered by the 401(k) to the IRS and therefore income limits do not apply on tIRA deduction. If someone could provide any experience they have with a similar situation that would be great.

Thanks again.

[MDM]

You are correct on both counts.

My income is going to be higher than the IRA deduction limit, but since I have not enrolled in this 401(k) even though it is offered, can I still make the full deduction for my $5,500 contribution from taxes?

Yes, and the IRS link you mentioned provides the justification (assuming you meet the criteria therein).

I also just wanted to confirm that a tIRA contribution does not reduce MAGI and only the 401(k) contribution does?

Correct.  See Publication 590-A (2015), Contributions to Individual Retirement Arrangements (IRAs).

[secondcor521]

It is my opinion that the author of the second link you referred to is inaccurate when she writes:  "If you are eligible to make salary-deferral contributions but elect not to, you are not considered an active participant for that year."  In cases where I am not sure, I prefer to go to the horse's mouth and read what the IRS has to say.

But in further looking at it, I think your situation might possibly be one where you are not covered.  Reading in Pub 590, I find:  "A special rule applies to certain plans in which it is not possible to determine if an amount will be contributed to your account for a given plan year. If, for a plan year, no amounts have been allocated to your account that are attributable to employer contributions, employee contributions, or forfeitures, by the last day of the plan year, and contributions are discretionary for the plan year, you are not covered for the tax year in which the plan year ends. If, after the plan year ends, the employer makes a contribution for that plan year, you are covered for the tax year in which the contribution is made."

So it looks to me as though if you did not make any contributions *and* your employer did not make contributions to your account, then it looks like you would not be covered.  TIL.

[DavidAnnArbor]

If you could lower your MAGI for tIRA by contributing $18K to your 401K, and maybe there's an HSA you could also contribute to, the tax savings would be tremendous and maybe you can lower your MAGI enough to qualify you for a tIRA deduction.
There's also a chart that determines whether it is worth it to contribute to a 401K even if there are high fees because it is outweighed by the tax benefits. It's somewhere on one of these threads.