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Contributing to retirement plans

Dear Tax Talk,
My wife and I earned approximately $135,400 in 2005, of which I have contributed $3,400 to my 401(k). I will be itemizing, and the deductions will come to about $20,000 to $22,000. My question is: In this scenario, can my wife and I contribute $4,000 each to Roth IRAs and $4,000 each to our traditional IRAs? Thanks.
-- Prithwee

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Dear Prithwee:
It used to be that you couldn't contribute to a traditional IRA if your AGI was over a certain amount and you or your spouse were covered by a retirement plan at work.

Now the AGI limit is gone for contributions.

However, your deduction of the contribution is phased out if you or your spouse are covered by a retirement plan, such as your 401(k), and your AGI goes over $80,000, in the case of a married couple. If you can't deduct your contribution to an IRA, then your best option is to see if you qualify to make a contribution to a Roth IRA. With a Roth, all your future withdrawals are tax-free, where with a nondeductible IRA, you pay tax on the IRA's earnings.

In 2005, you can contribute to a Roth IRA if your AGI is less than $150,000 in the case of a married couple. Your 2005 contribution limits are $4,000 for each spouse and $500 more for each spouse over age 49. But remember that contributing to a Roth does not save you taxes. If you want tax savings, then consider increasing your 401(k) contributions.

Bankrate.com's corrections policy-- Posted: Jan. 10, 2006
Read more Tax Adviser columnsAsk a question
 RESOURCES
10 must-know IRA terms
Roth IRA guidelines
Bankrate's 2006 Tax Guide
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