Having a 401(k) plan through your employer lets you contribute more to your nest egg and reap the benefits of employer contributions on your behalf. However, when you leave the job, whether you can contribute to an IRA and claim a deduction that year depends on when you left your employer and when contributions were made to your 401(k) plan.
As long as you're under 70 1/2 years old and you have compensation, you're always allowed to contribute money to a traditional IRA. Compensation means income from working or taxable alimony you receive. However, if you participate in an employer-sponsored retirement plan, such as a 401(k), you're not allowed to deduct your traditional IRA contributions on your taxes if your modified adjusted gross income exceeds the annual limits.
You're considered a participant in your 401(k) plan for any year that money gets added to your account, either through your own elective deferrals or through your employer's matching contributions. For example, say you contribute $500 to your 401(k) plan in January 2013, then get fired. Because money was added during the 2013 calendar year, you're considered a plan participant for all of 2013. Alternatively, say you get fired in November 2013, but your company makes a matching contribution to your account on Jan. 15, 2014. You're also a participant for 2014.
Just because you're covered by a 401(k) plan doesn't always mean you can't deduct your traditional IRA contributions -- the deduction is disallowed only if your modified adjusted gross income is too high. As of 2013, if you're single, your maximum deduction starts going down when your MAGI exceeds $59,000 and completely phases out at $69,000. For joint filers, you can deduct your entire contribution as long as your MAGI falls below $92,000. When it hits $112,000, you can't deduct any of your contribution.
Roth IRA Alternative
If you're not able to deduct your traditional IRA contribution, but still want to put aside money, consider a Roth IRA. Roth IRA contributions aren't deductible, so you never have to worry about whether you're covered by an employer plan or not. However, Roth IRAs do have an income limit that disallows contributions entirely if you make too much. As of 2013, you can make a full contribution if you're single and your MAGI doesn't exceed $112,000 or married filing joint and your MAGI doesn't exceed $188,000.
- Comstock Images/Comstock/Getty Images