401k or Traditional IRA for child tax credit

[b4laura]

My wife and I both have a 401k through work and a Roth IRA - Our empolyers do not match either of our 401k's.  This year we will make ~130k combined income which is the complete phase out of the child tax credit.  I was looking at ways to reduce the AGI and not let that credit go away.  If I have no match on my 401k (no real benefit outside of a traditional IRA) should we invest in a traditional IRA instead?  If I am reading correctly, a traditional IRA will reduce my AGI which a 401k does not and  every $1,000 I put in my traditional I earn $50 dollars back in my child tax credit (5% return for a transaction change). 

Any other ideas to reduce AGI?

[Sibley]

You're misunderstanding how these work.

Scenario A: 401k
You contribute the max to your 401k. The money is deducted, pre-tax, from your paychecks throughout the year. At the end of the year, you get a W-2, and the wages box will not include that amount, thus reducing your AGI, and you'd have 2 401ks (one for each of you).

Scenario B: Traditional IRA
You don't contribute to your 401k at work. Instead, you open a Traditional IRA account and put in the max amount. When you file your tax return, you'll deduct your contributions from your income, thus arriving at your AGI. Both of you would need your own IRA.

Really, the only reason to go with a traditional IRA over a 401k in your case would be investment options. Depending on what options are available through work, you might be fine with the 401k, and it would probably be easier.

[b4laura]

Thank you for clarifying.  For some reason the AGI calculator was stating IRA only... and got me thinking 401k did not count.  So the same holds true, every 1k I invest in 401k I reduced my AGI and therefore I collect $50/more back with the child tax credit.   Works for me.

[MDM]

For some reason the AGI calculator was stating IRA only....

If you were using TaxCaster, it ignores 401ks completely. 

As Sibley noted, the 401k deduction happens on form W-2 while the IRA deduction happens on form 1040.  Both reduce AGI compared with your gross (before any deductions) wages.  See also the case study spreadsheet tax calculations.

[seattlecyclone]

Be aware that the income limit for deducting full $5,500 traditional IRA contributions is $98k for a married couple when they each have a retirement plan at work. Therefore you'll both need to basically max out your 401(k) accounts before a deductible IRA even becomes an option for you.