A:

Your husband's employer should check the retirement plan box on line 13 of the 2005 Form W-2 only if your husband elects to make salary deferral contributions to the 401(k) plan during 2005. The general rule for 401(k) plans is that an individual is not considered an active participant if no contributions or forfeitures are credited to the plan on behalf of the individual. Therefore, if your husband does not contribute to the 401(k) plan for 2005, your Traditional IRA contributions will be deductible.

If you do not want your 2005 IRA contributions (total $9,000/$4,500 each) to remain in your IRAs, you may remove the amounts as 'return of excess contributions'. The returned contributions will be non-taxable, provided they are removed from your IRAs by your 2005 tax-filing deadline (usually Apr 15, 2006). If you file your tax return on time, you receive an automatic six-month extension to remove the amounts as return of excesses. You should have until Oct 15, 2006 to do this. When removing amounts from IRAs as 'return of excess contributions', any applicable earnings or losses must be added to or subtracted from the principal amount being removed. Amounts representing earnings (on the returned contributions) must be included on your tax return as taxable income.

As you may already know, if you are not eligible to deduct your IRA contributions, you may either treat the amounts as non-deductible contributions to your Traditional IRAs, or recharacterize the amounts to Roth IRAs.

Also, although a matching contribution would be a great incentive, don't be dissuaded by the lack of it. This is still an opportunity to fund your nest egg with up to $14,000 for the year on a tax-deferred basis. As you know, this reduces your taxable income and the amount accrues interest on a tax-deferred basis. It may be challenging to save that amount, but keeping your eye on the retirement ball makes it easier to handle. Contributing to the 401(k) plan could bring your retirement date a few years closer. Wouldn't it be great to retire early?

(To learn more about retirement plan contributions, check out Correcting Ineligible (Excess) IRA Contributions, Making Salary Deferral Contributions - Part 1 and Common Questions About Retirement Plans.)

This question was answered by Denise Appleby
(Contact Denise)

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