Can I Deduct My IRA Contribution If I Can Participate in a 401k?
If you have a 401k plan at work, you can still make a full $5,000 contribution to an IRA in 2011. Contribution amounts may be indexed higher in future years. Since your are covered by the 401k plan, the amount of the IRA contribution you can deduct may be reduced.
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Full Deduction Limits
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Since you are covered by a 401k plan, the IRS only allows you to take a full IRA deduction if your income is under certain limits. For someone who files as single or head of household, the adjusted gross income -- AGI -- limit for a full IRA deduction is $56,000 in 2011. If the tax filing status is married filling jointly, the AGI limit is $90,000. For someone using the married filling separately filing status, the income limit for any IRA deduction when covered by a 401k plan is $10,000.
Partial Deduction Limits
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If you income exceeds the limit for a full IRA deduction, the next check is for a partial deduction. A single or head of household tax filer can make a partial IRA deduction if the AGI is under $66,000. If your filing status is married filing jointly, the partial deduction income limit is $110,000. If your adjusted gross income on your income tax return is between the numbers listed above and these incomes, you can take a partial IRA contribution deduction.
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Calculating Partial Contribution
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If your income is between the two income limits for full and partial IRA contributions, the amount you can deduct is proportional to the amount of your income between the limits. For the single or head of household tax status, the IRA deduction amount drops by 10 percent or $500 for every $1,000 of income over $56,000. If your tax status is married filing jointly, the IRA deduction drops by the $500 for every $2,000 your income is above the $90,000 limit.
Roth IRA Income Limits
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If you exceed the income limits for having a 401k and deducting an IRA contribution, you might consider a Roth IRA. The Roth IRA contribution is not tax-deductible, but the proceeds can be withdrawn tax free in retirement. The income limit for making a Roth IRA contribution if you have a 401k plan is $107,000 for single and head of household filing and $169,000 for married filing jointly.
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