When participating in your 401(k) plan at work, you may decide you want to supplement your savings by opening an individual retirement account. Because retirement planning is so important, the U.S. government allows you to participate in both types of accounts, with some restrictions. The Internal Revenue Service will make certain you do not take tax breaks you are not entitled to, and it imposes some restrictions on IRA deductions if you participate in a 401(k) plan.
If you file as single or head of household, you can deduct contributions made to a traditional IRA while participating in a 401(k) if you meet the income guidelines. As of 2012, if your modified adjusted gross income is less than $58,000, you can take the full deduction for your IRA contribution, up to the maximum contribution of $5,000, or $6,000 if you are age 50 or older. Your eligible deduction phases out as your MAGI rises, until your eligibility for the deduction is eliminated at $68,000 of MAGI per year.
If you are married and file a joint return, you can have up to $92,000 in MAGI and still claim a deduction for your full IRA contribution up to the limits, even if participating in a 401(k). The deduction phases out at MAGI levels between $92,001 and $112,000, and you can claim no deduction if your MAGI is more than this amount. If you are married filing separately and lived with your spouse during part of the year, you can claim a limited deduction of eligible contributions if your MAGI is less than $10,000. If you did not live with your spouse and filed separately, the IRS views you as a single taxpayer for the purposes of IRA contributions and deduction eligibility.
Roth IRA Contributions
Roth IRA contributions are not deductible at any time, regardless of 401(k) plan participation or your MAGI. As of 2012, you can make a contribution to a Roth IRA of $5,000, or $6,000 if you are age 50 or older if you meet MAGI requirements. If your MAGI is below $173,000 and you are married filing jointly, you may participate in a Roth IRA with a full contribution. If you are single or head of household, full Roth IRA contributions phase out beginning at MAGI levels of $124,999. Married, separate filers living apart can make a limited Roth contribution as long as their MAGI is below $10,000.
If you are covered by a 401(k) plan at work and your MAGI is too high to allow you to qualify for deductible contributions to a traditional IRA or participate in a Roth IRA, you can make nondeductible IRA contributions. In fact, you can make a nondeductible contribution as long as you have earned income greater than or equal to the amount of your contribution. The same maximum contributions apply -- $5,000 if under age 50, and $6,000 if you are age 50 or older. Nondeductible contributions still grow tax-deferred until retirement.