One of my relatives recently changed jobs and her new company
does not offer a 401k plan for the first six months. Her previous
company did offer 401k. The question is, can she contribute to an
IRA? If yes, can she contribute the full allowed amount of $5000?
She cannot contribute to ROTH because of our high combined family
Thank you for all your help.
She certainly can contibute to a traditional IRA. There are no income limits
for that. There are limits for being able to deduct those contributions.
With no work plan available, the limits are higher:
Additionally, if she has no other IRAs with taxable amounts, then a
non-deductible contribution and immediate conversion to Roth is a
Thanks Brian. I guess I did not frame my question correctly. She had
401k for part of the year and does not have it for the rest of the
year. Are there any restrictions on deductible IRA contributions in
such case? The IRS publication was not very clear to me.
The nondeductible contribution followed by immediate conversion to
ROTH is an interesting idea.
I don't know. I suspect that if covered for any part of the year you have to
use that set of formulas. A suggestion might be to try the IRS helpline.
If there are no other IRAs, that can be a good solution.
To clarify a bit - If your wife has any pretax amount in the IRA there
will be tax due on conversion. The amount taxed is proportionate to the
post-tax amount of deposits compared to total balance.
e.g. Her current balance, all pretax deposits and earnings is $15000.
When she deposits $5000 and converts, 75% is taxed.
If you are covered by a qualified retirement plan (410K, 403, etc) for
one day a year,
then you fall under the income limits for IRA deductability. The
period is *not* considered as being covered. But the previous jobs
401K may be considered.
These count event you dont participate.
There is a box on the W-2 where the IRS tells you if you are covered
by a qualified plan.
But sometimes the employer checks it incorrectly with regards to the
I had this issue about IRA deductability once and successful appealed
to the IRS.
As Rick said, if she participated in an employer sponsored plan
(whether it be old employer or new) for even 1 day in 2010, she is
considered covered by an employer sponsored plan for the entire year.
A proper W-2 will reflect as much and her deductibility will be
limited based on her AGI.
Also note that even if she didn't participate in her old employers
plan during 2010, I can imagine a situation where her 6 month waiting
period would end during the mid-latter months of 2010 and she would
join the new 401(k) at an "open enrollment period" near the end of the
year. In doing so, she could make any IRA contributions from earlier
in the year non-deductible (retroactively, so to speak). In that case,
she may be smarter to wait until the first enrollment period in 2011
to join the 401(k). It's not a "now or never" type of deal.