I work for a company that offers 401K. I am qutting the job and moving to a different company . I plan to roll over the 401K into traditional IRA. I am married and I file jointly with my wife. My wife does not participate in her 401K plan. (Too expensive loads on the funds)
My Q is when I roll over my current 401K can I add $4000 as wifes IRA contribution and take a tax deduction on that for year 2007? Or is the traditional IRA acct separate from roll over IRA acct? We have a joint accout at the brokerage where I plan to roll-over IRA.
1) IRAs are individual accounts only. You have your IRA, your wife has hers. No intermingling.
2) Your wife cannot make a tax deductible contribution to her IRA because her workplace offers a retirement plan unless you two meet rather strict income requirements. Whether she chooses to participate or not, she still is considered "covered" by the 401K. (If her company makes a mistake and forgot to mark the "401K yes" box on her W2, you can get away with it until such time you are ever audited.)
Even with high loads, if your wife's company matches part of her
401(k) contribution, it probably still is worthwhile for her to contribute enough to capture the maximum match. That "free money" will overcome a lot of negatives.
And if not participating in her 401k means she's not saving anything at all for retirement, well that's not a good thing either. Open up a Roth, at least, if she can put $4k away this year. Then continue to fund it every year. No, you won't get the tax deduction for it now, but it will still grow tax deferred, and then, of course, tax free when it comes time to live off it.
Eveyone else very accurately answered our original question so I won't rehash it.
But is there a company match on our wife's 401k? If so, it's hard to imagine loads, fees, or expense ratios would outweigh the immediate benefit of the company match.
If no contributions are made in a defined contribution plan, the employee is not "covered" by the plan, and is not an "active participant" in the plan.
defined contribution plan for a tax year if amounts are contributed or allocated to your account for the plan year that ends with or within that tax year. "
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("Are you covered by an Employer Plan?")
"Generally, an employee is an _active participant_ if covered by (a) a defined benefit plan ... or (b) a defined contribution plan (for example, a section 401(k) plan) for any tax year that the employer or employee contributions (or forfeitures) are added to his or her account."
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However, there is another rule - one's IRA contributions are limited if EITHER one or one's spouse is covered (an active participant). It is this rule (and not the mere existence of the wife's defined contribution plan) that probably limits her ability to contribute to a deductible IRA. If the OP contributed to _his_ 401(k) this year, then he was covered, and thus his wife, though not covered, is still unable to contribute.
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(Pub 590, again) Mark Freeland snipped-for-privacy@sbcglobal.net
Looking through Form 590, it appears you are right. However, I've read many past complaints where people don't participate in their company
401Ks still get box 13 checked on their W2 disqualifying them from making deductible IRA contributions. I suspect the real answer is their payroll departments are too lazy to fix/reissue W2s and they just needed to get tough and raise holy hell.
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