Can I contribute to an IRA and a 401(k) ?

Dear Dollar Diva,
I thought that contributing to a 401(k) made me ineligible to make contributions to an IRA. According to GreenMagazine.com's "Getting Tax-Deferred Treatment on After-Tax Investments" that's not the case. What gives?

What gives is that you can contribute to an IRA, even if you're in a retirement plan at work; you just may not be able to deduct it.

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If you've contributed the maximum to your 401(k), and still have money left over for retirement savings, an IRA is a good place to put it.

The Diva will explain in plain English the rules for making contributions to the traditional and Roth IRAs. ("IRA" will be used when discussing traditional IRAs, and "Roth" when discussing the Roth IRA.)

But first read the Diva's comments on each one:

Traditional IRA -- deductible (partially deductible at certain income levels). If you're tax bracket is 28 percent or more, this is probably your best choice. There are income limitations if you or your spouse is in a retirement plan at work, and the Diva explains them below. If your tax bracket is 15 percent, move on to the Roth.

Roth IRA -- nondeductible. If you're in the 15 percent tax bracket, or your income is too high for a deductible IRA, the Roth is where you want to be. There are income limitations, but they're high, so you've got a good shot at being eligible. The Diva explains below.

Traditional IRA -- nondeductible. This is your least favorite choice after you've exhausted your other IRA options. Everyone's eligible, but there's paperwork involved. The Diva explains below.

Traditional IRA -- deductible and partially deductible

You and your spouse can each make a $2,000 contribution to an IRA, and take the full deduction for it, if neither of you contributes to a retirement plan at work. There is no income limit; you can each earn a million dollars and still get the deduction.

However, if you or your spouse is covered by a retirement plan at work, your IRA deduction may be reduced or eliminated. You read that right. Even if you're not covered by a 401(k) plan, your contribution may be limited, just because you smashed a glass or jumped over a broom. Another marriage penalty rears its ugly head.

How much you can deduct for an IRA depends on your Modified Adjusted Gross Income.

Modified adjusted gross income

Modified adjusted gross income is the adjusted gross income reported on your tax return modified for the following:

Income from rolling a Traditional IRA over to a Roth IRA;
Deductions or exclusions from an IRA, student loan interest, foreign income and housing costs; Employer adoption assistance; and interest on U.S. bonds used to pay college costs.

See IRS Publication 590, Individual Retirement Arrangements (IRAs) for details.

Here are the limitations for 2000.

Traditional IRA deduction limitations
Pension plan coverage	Deduction allowed by taxpayer or spouse
	Covered by pension plan	Not covered by pension plan
Single taxpayer ** (covered and not covered)	Full deduction for modified AGI up to $32,000	Full deduction allowed.
	Deduction phases-out between $32,000 and $42,000
	No deduction if modified AGI is more than $42,000
Both spouses (not covered)	Not applicable	Full deduction allowed.
One spouse (covered)	Full deduction allowed for joint modified adjusted gross income up to $52,000	Full deduction allowed for joint modified adjusted gross income up to $150,000
	Deduction phases out between $52,000 and $62,000	Deduction phases out between $150,000 and $160,000
	No deduction if modified AGI is more than $62,000	No deduction if modified AGI is more than $160,000
Both spouses ( covered)	Full deduction allowed for joint modified adjusted gross income up to $52,000	Not applicable
	Deduction phases out between $52,000 and $62,000
	No deduction if modified AGI is more than $62,000
**If you're married, filing separately, and did not live with your spouse at any time during the year, you are considered single for this purpose

If you're married, living together but filing separately, you get the shaft. Your IRA deduction phases out between $0 and $10,000, regardless of whether either of you is covered by a retirement plan at work.

If you're in the phase-out range, you need to figure out how much of your contribution is deductible. There's a user friendly "IRA Deduction Worksheet" in the Form 1040 Instructions that will walk you through the process.

Roth IRA

Your Roth contribution is never deductible, and if you're making a bundle, it may be limited or eliminated. The following table applies whether or not you participate in a retirement plan at work.

Roth contribution limitations
Taxpayer	Contribution
Married filing jointly	Full contribution allowed for joint modified AGI up to $150,000
	Contribution phases out between $150,000 and $160,000
	No contribution allowed if modified AGI is more than $160,000
Single,** head of household	Full contribution allowed for modified AGI up to $95,000
	Contribution phases out between $95,000 and $110,000
	No contribution allowed if modified AGI is more than $110,000
Married filing separately - and you lived with your spouse during the year**	Contribution phases out for modified AGI between $0 and $10,000
	No contribution allowed if modified AGI is more than $10,000
**If you're married, filing separately, and did not live with your spouse at any time during the year you are considered single for this purpose

What really makes the Roth special is:

Qualified distributions from a Roth are never taxed. Ever. Not in your hands and not in the hands of your heirs.
When you reach 70-1/2 you don't have to worry. You can still make contributions if you're working, and you don't have to take distributions if you don't want to.

For more on the Roth read the Diva's "Is the Roth IRA too good to be true?" and "Time is on your side with a Roth IRA."

Traditional IRA -- nondeductible

Anyone who works can make a nondeductible IRA contribution; there is no income limit. You can make a million dollars and still contribute up to $2,000 with no "ifs," "ands" or "buts" as long as the following holds true:

You are less than 70-1/2 years old
You earned at least as much as your IRA contribution. If you only earned $1,000, you can only contribute $1,000. (Alimony received counts as earned income, too.)
Your total contributions to all IRAs and Roth IRAs are not more than $2,000 for the year.
You make the contributions by April 15^th(or the following Monday if it falls on a weekend).

Diva alert: Make sure you report the non-deductible contribution on Form 8606 when you file your tax return. If you don't, you may have to pay tax on it when you take it as a distribution in the future.

To get the full scoop on IRA's and Roth IRAs from the horse's mouth, read IRS Publication 590, Individual Retirement Arrangements (IRAs).

Maximum contribution to all IRAs

The maximum amount a taxpayer can contribute to IRAs and Roth IRAs combined is $2,000 a year. For example, if you're eligible, you can contribute $1,000 to a deductible IRA and $1,000 to a Roth IRA in the same year.

If you want to bring joy to the kingdom, make a contribution to a spousal IRA for your non-working spouse. For more on this read the Diva's Can I have a spousal IRA? and IRAs are a girl's best friend.