IRA Contributions

[Variant]

I have a situation which has sort of caught me by surprise.

I worked for most of 2006 for a company at which I did not take part in their retirement program. I left that company in mid-September and started for a new company at which I _did_ sign up for their 401k and began contributing after my first or second paycheck.

It now appears that while in the past I was able to write off the full amount of my IRA contributions for the year (when I was at the previous company), I can now only write off a very small and almost inconsequential amount simply because I contributed to my at-work 401K for the last three months of 2006.

So whereas before I would be able to write of a nice, tax-impacting $4000, I can now only write off about $700 of a $4000 contribution. Obviously there is a tax advantage from my moneys that were taken out of my salary for my current at-work 401K, but I still think I would come out ahead tax-wise if I had just waited until after Dec. 31 to sign up for my new job's 401K.

Frustrating at the very least. Am I missing some wording somewhere that says I can pro-rate based on the % of the year I was with the old company? Is it actually true that if I had only been with my new company for two weeks and contributed to their 401K for that time I would be in the same situation? Just seems funky.

Obviously I should consult a tax professional, but thought I'd see what people in this forum had to say as well. TIA.

[LdiJ]

Originally Posted by Variant

I have a situation which has sort of caught me by surprise.

I worked for most of 2006 for a company at which I did not take part in their retirement program. I left that company in mid-September and started for a new company at which I _did_ sign up for their 401k and began contributing after my first or second paycheck.

It now appears that while in the past I was able to write off the full amount of my IRA contributions for the year (when I was at the previous company), I can now only write off a very small and almost inconsequential amount simply because I contributed to my at-work 401K for the last three months of 2006.

So whereas before I would be able to write of a nice, tax-impacting $4000, I can now only write off about $700 of a $4000 contribution. Obviously there is a tax advantage from my moneys that were taken out of my salary for my current at-work 401K, but I still think I would come out ahead tax-wise if I had just waited until after Dec. 31 to sign up for my new job's 401K.

Frustrating at the very least. Am I missing some wording somewhere that says I can pro-rate based on the % of the year I was with the old company? Is it actually true that if I had only been with my new company for two weeks and contributed to their 401K for that time I would be in the same situation? Just seems funky.

Obviously I should consult a tax professional, but thought I'd see what people in this forum had to say as well. TIA.

Yes, it does seem very unfair, but if you contributed to an employer's plan at all, and you are above a certain income level that is exactly what happens.

[efflandt]

It doesn't even matter if you contribute to a qualified employer's plan, if you are "eligible" for one (whether you contribute or not), it can limit deductable contributions to a regular IRA (ie, if "Ret.plan" is checked in W-2 box 13).

So if you are eligible (income limits) for a Roth IRA, it would be better to put non-deductable contributions there. The after-tax contributions can be withdrawn any time without penalty, qualified gains are never taxed, and no required minimum distributions.

It can also be an accounting nightmare keeping track of deductable/non-deductable contributions in a regular IRA if there is a time lapse between last non-deductable contibution and first distribution if you do not want to be double taxed. I had to dig up an unknown tax return 1983-1995 when I recently started gradual IRA to Roth IRA conversions (found 1991 in time to amend 2005 in January 2006).