Q&A: IRA contributions and tax deductions

Dear Liz: I am changing jobs because of a layoff. I contributed to my former employer’s 401(k) to the extent possible. My new employer also offers a 401(k), but I won’t be eligible for a year.

I want to use an IRA in the meantime. I do not understand how I should answer the question on the tax form about whether my employer offers a retirement plan when I am determining how much of my IRA contribution I can deduct. My employer does, obviously, but I can’t participate yet. Advice, please?

Answer: You’re smart to continue your retirement savings while you wait to become eligible for the new employer’s 401(k). Missing even one year of contributions could cost you tens of thousands of dollars in lost retirement income.

When you’re not covered by an employer plan, all of your contribution to an IRA is typically deductible.

When you are covered, your contribution’s deductibility is subject to income limits. In 2015, the ability to deduct an IRA contribution phases out between modified adjusted gross incomes of $61,000 to $71,000 for singles and $98,000 to $118,000 for married couples filing jointly.

To be considered covered by an employer plan, you have to be an active participant, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. That means money has to be put into your account by you or your employer or both.

Here’s the twist: You’re considered covered for the whole tax year if you participated in a plan during any part of that year. So the IRS will consider you an active participant for 2015 because you were contributing to your former employer’s plan for part of this year.

If you start contributing to your new employer’s plan when you become eligible next year, you’ll be considered covered for 2016 as well.

You could decide not to contribute to the new employer’s plan until 2017 to preserve your IRA’s deductibility, but it probably makes more sense to start contributing to the new plan to get both the tax break and any match.

If your contribution to an IRA isn’t deductible, consider making a contribution to a Roth IRA instead.

In retirement, withdrawals from a regular IRA will be subject to income taxes while withdrawals from a Roth IRA will be tax free. In 2015, your ability to contribute to a Roth phases out between modified gross incomes of $116,000 to $131,000 if you’re single and $183,000 to $193,000 if you’re married.

Monday’s need-to-know money news

401k-planToday’s top story: How to choose the right 401K plan. Also in the news: Money losses you can’t claim on your taxes, the benefits of prepaying your mortgage, and how to survive living on a budget.

Do You Have the Right 401K?
Picking the plan that’s right for you.

These Money Losses Won’t Help You at Tax Time
Losses you can’t write off.

Should You Prepay Your Mortgage?
Prepaying could put more money in your pocket.

5 Strategies That Make it More Fun to Live on a Budget
It doesn’t have to be miserable.

Friday’s need-to-know money news

taxesToday’s top story: How to save money on your taxes by deducting work-related expenses. Also in the news: Learning about financial therapy, decreasing credit card limits, and financial advice for baby boomers.

How IRS Form 2106 Can Save You Money on Taxes
Deducting the work expenses your employer doesn’t cover.

What You Should Know About Financial Therapy
Getting to the deeper root of money issues.

The Average Credit Card Limit Is Dropping: What It Means for You
Lower limits across the board.

Five Easy Pieces of Financial Advice for Baby Boomers
Planning for the road ahead.

5 Reasons Every Boomer Should Stick to a Budget
More important now more than ever.

Tuesday’s need-to-know money news

scamToday’s top story: How to spot a credit repair scam. Also in the news: Using the home office tax deduction with a mortgage interest rate deduction, a costly tax trap older Americans need to avoid, and answers to embarrassing money questions.

Top 4 Ways to Spot a Credit Repair Scam
If it looks too good to be true, it usually is.

How the Home-Office Deduction Works With the Mortgage-Interest Deduction
Don’t pay more than you have to.

Don’t Get April-Fooled by This Very Costly IRS Tax Trap
An important reminder for older Americans.

3 Money Questions Everyone’s Too Embarrassed to Ask
Remember…there are no stupid questions.

Friday’s need-to-know money news

HealthCare-Medical-Identity-TheftToday’s top story: What to do if you’re an Anthem insurance customer. Also in the news: TurboTax stops state filings, how your own personal lottery can add up to big savings, and how your pet can fetch a tax deduction.

Millions of Anthem Customers Exposed: What It Means for You
Find out what you should do if you’re an Anthem customer.

TurboTax halts state filings amid fraud outbreak
What this means for TurboTax customers.

Pay Your Own Personal “Lottery” to Save Money Regularly
Then ten dollar a day habit that could add up to big bucks.

How Your Pet Can Dig Up a Tax Deduction
A deduction, not a dependent.

4 frequent flier mile pro tips that anyone can use
Getting the most from your miles.

Friday’s need-to-know money news

download (1)Today’s top story: How to tell when credit card rewards are actually worth it. Also in the news: Big changes ahead for your 401(k), using your job hunting expenses as tax deductions, and how to determine if a charity is worth your hard earned money.

5 Times Credit Card Rewards Are Worth It
When credit cards rewards truly pay off.

5 Future 401(k) Changes You Need to Keep an Eye On
Big changes are ahead.

Writing Off Your Job Hunting Expenses
Your job search expenses could be tax deductible.

How to Pick a Charity
Making sure your money goes where its needed.

5 Unconventional Ways To Use Your Accounts
Could your 401(k) be used to purchase your new home?

Monday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Four things prospective homebuyers should never say. Also in the the news: Why cable a la cart could end up costing you more, five ways to save on gas this summer, and financially savvy gifts to get the grad in your life off to a good start.

Will unbundling cable save you money
Paying for only the channels you watch could turn out to be more expensive

4 Things Homebuyers Should Never Say
You never want to tip your hand.

5 Ways to Save Money on Gas This Summer
More money for the good stuff.

How to Take Tax Deductions for Bad Debts
Making bad debt slightly more tolerable

Financially Savvy Gifts For New Graduates
Giving a gift for the future.

Monday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Personal finance tips for single parents. Also in the news: Overlooked tax deductions, deciphering credit card offers, and upgrading a forgotten 401(k).

5 Personal Finance Tips for Single Parents
Planning for emergencies is key.

5 Tax Deductions That Are Typically Overlooked
Don’t shortchange your deductions.

How to Read a Credit Card Offer
Pay close attention to the fine print.

Upgrading forgotten 401(k)s
Reclaiming your retirement.

How A Personal Finance Journalist Manages Her Own Money
Learning from the experts.

Tuesday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: How to cope when friends and family steal your identity. Also in the news: How to deal with defaulting on your student loans, storing your digital items for free, and five tax credits and deductions you should know about.

When Family and Friends Steal Your Identity
Dealing with the financial and the emotional fallout.

Debt Adviser: How to deal with student loan debt default
Communication with lenders is key.

How to store your e-memories for free
The battle for the Cloud means cheaper storage for everyone.

5 Tax Credits and Deductions You Need to Know About
Don’t give Uncle Sam more than you absolutely have to.

Retirement: A third have less than $1,000 put away
A scary situation.

Friday’s need-to-know money news

IRS 1040 Tax Form Being Filled OutToday’s top story: Choosing between the standard or itemized tax deduction. Also in the news: Taking steps to a better financial future, money mistakes to avoid during your 20s, and the four letter word that can ruin your credit.

Should You Take the Standard or Itemized Tax Deduction?
While one might be easier, the other could save you more money.

7 Steps To A Better Financial Future
Begin with the end in mind.

Money Mistakes to Avoid in Your 20s
Don’t makes mistakes in your 20s that you’ll be paying for in your 40s and 50s.

The 4-Letter Word That Can Ruin Your Credit
Take a guess.

3 Ill-Advised Reasons Not to Buy Life Insurance
You’re not getting any younger.