 Contributing
to retirement plans
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 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
 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.
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