The Internal Revenue Service (IRS) set the rules for retirement fund contributions and you can contribute to a 401(K) and an IRA (individual retirement account) if you meet eligibility requirements set by the IRS. You may not be able to claim a deduction for all the contributions on your personal income tax return that you file at the end of each tax year. Let’s look at some of the restrictions that are listed below so that you will be able to determine how to invest your retirement dollars.
You can contribute to a 401(K) and an IRA but you may have restrictions. The IRS lists the limits that are applicable for the tax year in IRS Publication 590. You can look up the information for your filing status in this booklet. You cannot claim deductions on your traditional IRA if you make too much money. With both plans you will have to determine if your modified adjusted gross income (MAGI) is over the IRS limit for your filing status. If so, you cannot claim deductions for both accounts on your income tax return.
You can calculate MAGI if you want to do a contribution at the maximum levels. MAGI is your adjusted gross income as figured on IRS Form 1040 and includes amounts that you make to the adjusted income. Adjustments can include a deduction you claimed related to student loan money, to money contributed to other IRA accounts, school expenses such as tuition and fees, and any employer-paid expenses toward adoption. If you can contribute to a 401(K) and IRA you must make sure that you are eligible by the MAGI limitations.
If the IRS rules do not allow you to claim deductions for a traditional IRA you can open one of the Roth accounts. The Roth account contributions are made with after tax dollars and the earnings from the investments are deferred from taxation until you make a withdrawal. You can make withdrawals without taxation if you have had the account for at least a five year period and you are at least 59 ½ years of age. The contributions that you made to the Roth plan are always tax-free. It will be the money your retirement fund account earned that will be taxed when you withdraw it. You can contribute to a 401(K) and an IRA if you follow the IRS rules set forth in Publication 590 to do so.