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Q: Last year, I briefly worked for a local school district that had a pension fund. Participation was mandatory. I contributed only $650 in the four months I worked there.

But when I tried to make my usual tax-deductible IRA contribution for the year, my bank said that brief participation was enough to prevent me from contributing. My income was more than $100,000 so I’m looking for ways to reduce my tax bill.

Is what the bank said true — am I out of luck?

A: Yes, if what you want is a tax deduction, said Nicholas Kaster, a senior analyst with tax research firm CCH Inc.

Anyone who is an “active participant” in a workplace retirement plan for any part of a tax year faces significant limits on how much of an IRA contribution, if any, may be deductible.

For single filers, the ability to deduct a contribution begins to phase out at $45,000 and disappears entirely at $55,000; for married filers, the phase-out range is $65,000 to $75,000. (These figures are for 2004 contributions, which can be made until April 15 of this year.)

That does not mean, however, that you can’t contribute to an individual retirement account — just that you can’t deduct your contribution. Anyone who has earned income can make a nondeductible contribution to an IRA.

If your income is below certain limits, you might consider contributing to a Roth IRA, which offers tax-free withdrawals in retirement. You can contribute as much as $3,000 for tax year 2004 if you are single and your income is less than $95,000 or if you are married and your income is less than $150,000. (Your ability to contribute to a Roth phases out as your income rises; singles with incomes of more than $110,000 and marrieds with incomes of more than $160,000 can’t contribute.)

With all IRAs, you can make an additional $500 “catch-up” contribution if you are 50 or older.

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Categories : Investing, Q&A, Retirement, Taxes