I was talking about some random things with a friend of mine this weekend when the topic of IRA's came up. I asked him if he had one, and he told me that he didn't think he was eligible for one since he has a 401K at work. At the time I knew you can have both an IRA and a 401K or other company sponsored retirement plan, and I was pretty sure(not 100% though) that he makes less than $100K. Therefore, I told him I was pretty sure he was wrong. A little research reveals that we we're both right.
From the IRS website:
Can an individual contribute to a traditional IRA if he or she has other retirement plans?
Yes, individuals can contribute to a traditional IRA whether or not they are covered by another retirement plan. However, they may not be able to deduct all of their contributions if they or their spouses are covered by an employer-sponsored retirement plan.
The details are in publication 590 (yeah baby!) To save you some time, here they are for 2008:
Your maximum tax deductible Traditional IRA contributions are $5000($6000 if 50 or older)
- If you are single, your phase out begins at $53,000 (Yikes, that is smaller than I thought)
- For married filing jointly the phase out occurs between $85,000-$105,000
- Less than $10,000 for a married individual filing a separate return.
For Roth IRA's , its a different story.
- If you are single you can contribute as long as your income is less than $101,000
- If you are married and filing jointly, its $156,000.
And if you don't have an employer sponsored plan, then you can deduct the full amount no matter what your income is( if your spouse has a plan, then a $156,000 limit applies to joint filers)
Something I don't think many people realize is that you can contribute to a Traditional IRA even if you don't get the tax deduction benefit. You still get the benefit of tax deffered growth on your investments. Of course, if you exceed the Traditional IRA limits but not the Roth, then the Roth would be better for you than contributing nondeductible earnings to a Traditional IRA
If you exceed the income limits of a Roth IRA you can't contribute to one. If you over contribute, you will be subject to an excise tax of 6% unless you withdraw the extra amount before April 15.
(From wikipedia: An excise tax is a type of tax charged on goods produced within the country (as opposed to customs duties, charged on goods from outside the country).
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