IRA and 401k

[Gadgetfreak]

1) Where is the rule that states if you are offered a 401k through your company (and are eligible), you may not contribute to an IRS?

2) If someone is unemployed in the first half of the year and contributed the max to an IRA and then he is hired and immediately eligible for the 401k in the same year, is he allowed to contribute? If so, would it be the difference between the limit and what he contributed to the IRA?

[ESOP Guy]

The rule isn't you can't contribute to an IRA, it is you can't deduct your contribution.

It would be an after-tax IRA contribution.

My guess is start with the IRS publication regarding IRAs.

[ETA Consulting LLC]

IRS Notice 87-16.

You must actually receive (or actually make deferrals) contributions in order to be considered as covered by a plan at work. The reference point is at any time during the year.

Good Luck!

[jpod]

Toolkit draws an important distinction. Also, even if you do make 401k contributions, your IRA contributions would be non-deductible (or partially non-deductible) only if your adjusted gross income (or if married your and your spouse's AGI combined) is high enough.

[Gadgetfreak]

Yes, that is an excellent point about being allowed to make IRA contributions and the contributions being deductible. Thanks for clearing that up. So this leaves two additional questions:

1) Are you saying the making of 401k contributions is what deems the IRA contributions as ineligible for deductions? I always thought it was the "eligibility" to make the 401k contributions.

2) If the reference point is at any time during the year, my original example leads me to question what happens if the guy contributes beginning on 7/1? Are all of his IRA contributions from the beginning of the year ineligible for deduction? Can he put some money into the 401k but not exceed his 402g limit?

Thx.

[ETA Consulting LLC]

1) Merely be eligible to make deferrals does not do it. You'd actually have to make deferrals (or receive some other company contribution/forfeiture allocation) under the plan.

2) You're looking at a 12 month period. It's not segmented.

Good Luck!

[mbozek]

Yes, that is an excellent point about being allowed to make IRA contributions and the contributions being deductible. Thanks for clearing that up. So this leaves two additional questions:

1) Are you saying the making of 401k contributions is what deems the IRA contributions as ineligible for deductions? I always thought it was the "eligibility" to make the 401k contributions.

2) If the reference point is at any time during the year, my original example leads me to question what happens if the guy contributes beginning on 7/1? Are all of his IRA contributions from the beginning of the year ineligible for deduction? Can he put some money into the 401k but not exceed his 402g limit?

Thx.

See IRS pub 590 P 11 -15 for eligibility for deductible IRA contributions based on participation in a qualified plan during tax year.

[K2retire]

If someone is unemployed in the first half of the year and contributed the max to an IRA and then he is hired and immediately eligible for the 401k in the same year, is he allowed to contribute? If so, would it be the difference between the limit and what he contributed to the IRA?

If you were unemployed for half the year, there is a good chance that your income will be low enough that you can do both an IRA and the 401(k). Start with the research and you may save yourself some time.