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Does any participation in an employer sponsored plan make one ineligible to participate in a self-directed IRA?

I have two part-time jobs. 95% of my wages are generated at job #1 where no 401K plan is offered. I work infrequently at part-time job #2 where a 401K plan is offered and I have participated in the plan. I will only accumulate a couple hundred dollars in taxable wages in 2017 from job #2, and will therefore contribute less than $50 to the 401K plan. Given that, I would like to opt out of the 401K plan and contribute to a self-directed IRA based on the sum of my wages from both jobs. THE PROBLEM. In 2017 I have worked at job #2 and had tax deductible contributions allocated to the employer sponsored 401K plan (the amount is less than $20). Since I have already participated in this plan in 2017 is there a way to have my employer or sponsor ‘recall’ those funds from the employer based 401K account? Then I will not have participated in any employer sponsored plan in 2017 making me eligible to participate in a self-directed IRA.?

Mar 15, 2017 by MICHAEL in  |  Flag
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Based on my tax research resources, the short answer is participation in an employer plan will make you ineligible for a tax-deductible IRA in the same year.

An employee is covered by an employer retirement plan for a tax year if the employer has a:

• Defined contribution plan (profit-sharing, 401(k), stock bonus, or money purchase pension plan) and any contributions or forfeitures are allocated to the employee’s account for the tax year. • IRA-based plan (SEP, SARSEP, or SIMPLE IRA) and the employee has an amount contributed to the IRA for the tax year. • Defined benefit plan (403(b) annuity, cash balance, or plans for federal, state, or local government employees, other than section 457(b) plans) and the employee is eligible to participate within the tax year. An employee is covered even if he or she declines to participate, does not make a required contribution, or does not perform the minimum service required to accrue a benefit for the year.

No vested interest. If any amount is allocated to or a benefit accrues to an employee’s account, the employee is covered by that plan even if he or she has no vested interest in (legal right to) the account.

Since it's early in the year, you may be able to talk with your employer about withdrawing from the plan, taking the deferred contribution as income and adjusting your payroll records so that Box 13 on your 2017 W2 will not be checked. That is an operations issue you'll need to refer to the payroll and 401k administrator.

On the other hand, you may still consider a contribution to a non-deductible traditional IRA. It would need to be coded this way with the custodian and reported on your taxes to account for basis (and future tax issues). So if you can't successfully 'recall' funds, consider the non-deductible route.

And depending on your income, you may want to consider a Roth IRA contribution instead.

You really should consider having a good tax advisor as part of your team even if you are planning to direct your own investments.

Comment   |  Flag   |  Mar 16, 2017 from Amesbury, MA

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You can still contribute to an IRA even though you are able to contribute to a 401k, assuming you do not exceed the annual income limits. here is the link to the IRS website regarding this https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work Even if you exceed these income limits you can still contribute to the IRA, but the trouble will come with how you can deduct the contributions on your taxes. If you exceed the income limits you can make the contributions, you just gotta pay taxes on that money. You will need to keep an accounting of the fact you paid the taxes on this money for when you take the money out in the future to make sure you don't pay the IRS double tax on the principal.

Comment   |  Flag   |  Mar 20, 2017

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