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Posted by cballard@tyyni.net on December 28, 2006, 8:15 pm
Please log in for more thread options dingodog_1979@yahoo.com wrote:
> My employer has a 401(k) and I was stupid enough not to
> participate in it (although I am eligible to participate).
> Can I still make a tax-deductible contribution to IRA this
> year? I read the rules but I am a little confused by who is
> considered an active participant - somebody who actually
> made contributions to 401(k) or somebody who is just
> eligible to participate (although not participated for
> whatever reason)?
An individual is an active participant in a defined
contribution plan if either employer contributions, employee
contributions, or forfeitures are allocated to the
individual's account with respect to a plan year that ends
with or within the individual's tax year. IRS Notice 87-16,
Section I.A.
Note that the IRA deduction limitation kicks in if you were
an active particpant in any retirement plan set up by your
employer. Before taking the deduction, make sure that your
employer didn't make any contributions to your 401(k) and
that you aren't covered by something in addition to the
401(k) plan. Another thing to watch out for: Some employers
automatically kick in 3% of every eligible employee's
salary, even if the employee didn't make a
contribution--this 3% funding causes the 401(k) plan to meet
a safe harbor requirement so that highly compensated
employees in the plan don't have to worry about some
limitations that would otherwise be imposed by the pension
laws.
If you look at the W-2 form from your employer, if the
"Retirement Plan" box is checked, the employer is treating
you as an active participant in a retirement plan.
Employers have been known to be wrong in this regard,
checking the box for every employee without really looking
at who was participating. If there were no contributions to
your 401(k) account, you were not covered by any other
retirement plans, and the "retirement plan" box is still
checked, you can go ahead and make the IRA contribution, but
be prepared with an explanation in case the IRS sends you a
letter.
--Chris
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