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Jun 11 2012 12:00AM

Question

If I participate in my employer-sponsored 403(b) account, is it true that I cannot also make contributions to a standard IRA, regardless of my earnings or amount I am contributing to the 403(b)?

Answer

If you participate in your employer sponsored retirement plan, you are still eligible to make a Traditional IRA contribution, up to $5,000 per year (or $6,000 per year if you are age 50 or older) regardless of how much you earn. THE CATCH: if you have a plan at work (regardless if you save into the plan), then the tax deductibility of your IRA contribution may change.

For the year 2012, IRS rules state that if you are covered by a retirement plan at work, and you file a joint return (or qualifying widow), you may take a full deduction as long as your modified adjusted gross income (MAGI) is less than $92,000. If you file as single or head of household, you may take a full deduction as long as your MAGI is less than $58,000. If you file as married filing separate, that number is $10,000. Beyond those thresholds, the ability to deduct the IRA contribution is gradually phased out until it is eliminated entirely.

Here are the facts:

  • If you have no retirement plan through work, you can take a tax deduction, up to the maximum contribution limit, in your IRA with no restriction due to your level of income.
  • For 2012, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:
    • More than $92,000 but less than $112,000 for a married couple filing a joint return or a qualifying widow(er),
    • More than $58,000 but less than $68,000 for a single individual or head of household.
  • If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $173,000 but less than $183,000. If your modified AGI is $183,000 or more, you cannot take a deduction for contributions to a traditional IRA.

So, you can still save into an IRA, but may not be able to take a tax deduction for the contribution based on the rules above. You can save up to $17,000 (or possibly more) into your 403(b) each year, so if you want a tax deduction and are not maximizing your 403(b), you could increase your savings at work.

If you are maximizing your savings at work, you could save into a Roth IRA (after-tax), but you have limits depending on your income level. There are many ways to increase your retirement savings. If you wish to learn more, we suggest consulting the IRS Publication 590: Individual Retirement Arrangements.

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