I worked for several years at a job where I participated in a 401(K). In order to qualify, you had to be employed for the entire calendar year. I left that job in March of last year. I received a distribution for my 2005 employment in the first half of 2006. Since I didn't work all of 2006, I won't receive any contributions for 2006. All of this is straightforward and not a surprise to me. I received my W-2 for 2006 and box 13 (retirement plan) is checked. Since I won't be receiving any contributions for
2006, will I still be able to make a tax-deductibe IRA contribution for 2006? I assumed that I would, but now am unsure. Could someone please clarify this for me?
Sure, Neal. The fact is that the ability to make a tax-deductible contribution to an IRA is tied to your having received income from wages or self-employment. Dividends, interest, retirement or annuity income don't count. Social Security income doesn't qualify you. Only wages or self-employment income! Now for deductibility, there is also a limit on the amount of Adjusted Gross Income (AGI) which you have -- and that varies, depending on whether your employer offers a retirement plan. Basically, if your 2006 "Modified AGI" was less than $50,000, your IRA is deductible. If it was between $50K and $60K, part of it was deductible. Once you reached $60K, none of it could be deducted. (For MFJ, the range is $75K - $85K.) So those are the quick basics. See your 1040 Instructions or Pub 590 for full information. Bill
You're comparing apples with oranges and here is why i say that. In your mind, you think you did not participate in a retirement plan because company didn't put anything into it. However you were indeed still in the plan, hence that box
13 was checked, regardless of company contributions or your own. So then, only way to fund an IRA is for you to do it on your own. And if your income is low enough, you do qualify for full deductibility. If not, you may still qualify for opening and funding a ROTH IRA. Check into it. ChEAr$, Harlan Lunsford, EA n LA
That doesn't necessarily follow. Even if you are "in" a
401(k), you're only considered to be participating if you put in money into your account, if your employer puts in money into your account, or if any forfeitures are allocated to you. If none of that happens, you didn't "participate", even if you were enrolled. This is in contrast to a defined-benefit plan where IIRC, just being in the plan is considered "participating" under the tax laws. So from what the original poster said, the company may well have erroneously checked the "Retirement" box in Box 13. It's not like it never happens.
The "retirement plan" box is only supposed to be check if the employee is an "active" participant in the plan. Merely being a participant is not enough. An active participant is someone that is either
- covered by a defined benefit plan at any time during the year (this doesn't apply to 401(k) plans); or
- covered by a defined contribution plan (e.g. a 401(k) plan) and had either employer or employee contributions added to his or her account during the year From the OP's original posting, neither he nor his employer made any contributions to the plan in 2006. If that is actually the case and the OP was not covered by a defined benefit plan, then the "retirement plan" box should not have been checked. If that box is not checked, then the income limitations on making deductible contributions are much higher (if the OP's spouse was an active participant in a plan) or are lifted altogether (if the OP is not married, is not filing a joint return, or if the OP's spouse is not an active participant in a plan). I would recommend that the OP take a loook to make sure that there were no additions to his account in 2006. If there weren't, he should contact his former employer's HR department and find out why the box was checked. If it was checked improperly, the employer can issue a corrected W-2 form. If it was checked improperly and the employer refuses to issue a corrected W-2 for, the OP could still take the deduction for an IRA contribution, but the OP needs to be ready to answer an inquiry from the IRS (which probably won't come for another two years). A lot of employers don't understand how to properly use this box. It generally has no effect on the employer so they take the easy way out and just check it for everyone. Taking this easy way out could have a significant effect on an employee that wants to make a deductable IRA contribution.
By George you're right, Rich. Yesterday (or was it day before?) was rather busy. That's my excuse and I'm sticking to it! In fact I should have remembered last year when I purposely did not let my corporation contribute to my SEP IRA so I could (for the last time) contribute to a regular IRA the max of 5000.
And I spect that's really what happened in his case.
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