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)? Thanks!
Check your W-2 form and see if the "pension plan" box is checked. If it is, you are covered by a qualified employer pension plan and your IRA may not be deductible.
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
Even though you did not "participate" in it, which I take it means you didn't contribute to it, did employer contribute to it on your behalf? If so, you're considered covered for that year. However depending on your income you may be able to make an IRA contribution nonetheless. Holiday ChEAr$, Harlan Lunsford, EA n LA
And these are sometimes wrong too. I worked parttime for organization which excluded me from pension participation, yet the box was checked. The CA revunues would periodically catch this discrepency and I had to get an letter from the organization.
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