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Can I still deduct my traditional IRA if I have a 401(k)?

May 29, 2002

Subject:  IRA
From:  Sayeedur
Date:  Mon, 28 Jan 2002

My employer has a 401(k) plan and I am enrolled in it. Can I still deduct my traditional IRA?

Thanks for your time,
Sayeedur

Answer

Date:  February 2002

Hello Sayeedur,

Here are the limits applying to 2001 IRA deductions:

For single persons, the $2,000 traditional IRA deduction is phased out for the excess of modified adjusted gross income over $33,000. The phaseout formula is (modified AGI - $33,000) / $10,000 = fraction of deduction disallowed. No deduction is allowed when modified AGI exceeds $43,000.

For married persons filing a separate return, the phaseout formula is modified AGI / $10,000 = fraction of deduction disallowed. No deduction is allowed when modified AGI exceeds $10,000. However, a husband and wife who live apart at all times during the tax year aren't treated as married for purposes of these limits, and use the limits that apply to a single taxpayer.

For married persons filing a joint return, if both individuals are covered by an employer's retirement plan, the phaseout formula is (modified AGI - $53,000) / $10,000 = fraction of deduction disallowed. No deduction is allowed when modified AGI exceeds $63,000. The same phaseout applies for an active participant spouse who files a joint return.

The phaseout for a married person who is not an active participant but whose spouse is would be (modified AGI - $150,000) / $10,000 = fraction of deduction disallowed. No deduction is allowed when modified AGI exceeds $160,000.

Modified AGI includes taxable social security and railroad retirement benefits and the disallowance of passive activity losses. The amounts excluded for educational U.S. Savings Bonds, employer paid adoption assistance, foreign earned income and housing must be added back. The deduction for student loan interest and the deduction for contributions to IRAs must be added back.

And you thought that was an easy question?

Good luck!
Mike Gray

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