IRA Contribution Rules If You Have a 401k

Your 401k plan -- or your 403b or 457, depending on where you work -- is regarded as an employer-sponsored pension plan by the IRS. You still can contribute to a traditional IRA or a Roth IRA, but participating in the 401k reduces your opportunity to get a tax deduction for your IRA contributions.

Contribution Limits

For 2010 and 2011, you can contribute up to $5,000 -- plus another $1,000 if you're age 50 or older -- to an IRA. The limit applies to either a traditional IRA or to a Roth IRA, but you can't contribute the full amount to both. You can split your contribution between a traditional IRA and a Roth as long as your total contribution does not exceed the IRS limit.

Tax-Deductible Contributions

Regardless of your participation in a 401k plan, all Roth IRA contributions are after-tax contributions. The IRS annually sets income limits restricting tax deductions for traditional IRA contributions if you have a 401k. For 2011, the limits have been slightly increased. If you are single, your income must be no more than $56,000 to deduct your entire IRA contribution. You can make a partial deduction if your income is less than $66,000. If you are married filing jointly, the income limit for a full deduction is $90,000 and up to $110,000 for a partial deduction.

Roth Income Limits

There are income limits on Roth IRA contributions regardless of your participation in a work pension plan. To make a full Roth contribution in 2011, your income must be no more than $107,000 if you are single and no more than $169,000 if you are married filing jointly. The range for partial contributions runs up to $122,000 for single taxpayers and $179,000 for married taxpayers.

After-Tax Contributions

There are no income restrictions for after-tax contributions to a traditional IRA. So, if your income is too high to make a Roth contribution, you can put money in an after-tax traditional IRA instead. The earnings on those contributions can grow tax-deferred, and you will pay taxes only on the investment growth -- not the contribution -- when you take a distribution. Beginning in 2010, though, the income restrictions regarding conversions from a traditional IRA to a Roth were lifted . So, you can make an after-tax traditional IRA contribution and convert it immediately to a Roth. It's important that you closely follow IRS guidelines for IRA conversions.

Contribution Deadlines

You can make IRA contributions for any tax year until your tax-filing deadline. That's April 18, 2011, for Tax Year 2010 or Oct. 17, 2011, if you file for an extension. Make sure your IRA administrator knows the tax year to which your contribution should be credited.

references