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George Saenz, the Bankrate.com Tax Talk columnistJuggling money in retirement plans

Dear Tax Talk,
I have a 401(k) plan through my work. My wife's work has just offered a
401(k)
option, which we'd like to take advantage of. As the end of the year nears, I've been calculating our tax situation, and I realize now I should have contributed more to my 401(k) this year.

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Basically, I'd like to find a way to invest an extra $4,000 in retirement that I can also reduce my AGI by, saving just under $1,000 in tax. My wife's 401(k) plan is limited to a 25 percent maximum contribution per pay period. Given the short time before year end, we could not get a meaningful amount into it. Our AGI is likely to be above the $75,000 traditional IRA phase out for deductions, but I've heard that if my wife does not have an employee-run 401(k), the phase out for deduction is extended to $150,000, which would be well within reach.

I'm planning on opening a traditional IRA in my wife's name, transferring the $4,000 into it, then afterward opening the 401(k) at my wife's work and rolling the IRA into the 401(k). Her 401(k) plan indicates you can roll in traditional IRAs. Do you think this is the easiest solution? From what I've read, it does seem legal. Thanks much in advance.
-- Matthew

Dear Matthew,
You've apparently done your homework. It used to be that, up until a few years ago, if one spouse was in a retirement plan at work, the other spouse was severely limited in making a deductible IRA contribution.

Now, instead of having your deduction phase out when AGI is over $75,000, a married couple with only one active participant in a plan can make a fully deductible contribution when their AGI is below $150,000. The deduction for the nonparticipating spouse is phased out between $150,000 and $160,000. Beginning in 2007, the AGI thresholds will be indexed for inflation, which will allow deductible contributions at higher income levels.

The only question of concern is when would your spouse be eligible to participate in her employer's plan if she misses the initial enrollment? She might have to wait out six months or a year before she is allowed to enroll in the company plan. But I'm sure you've already checked this out.

To ask a question on Tax Talk, go to the "Ask the Experts" page and select "taxes" as the topic.

Bankrate.com's corrections policy-- Posted: Nov. 22, 2006
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