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)

RELATED FAQS
  1. Can you have both a 401(k) and an IRA?

    Discover how a retirement investor might choose between investing in a 401(k) and an IRA, and learn why he or she may benefit ... Read Answer >>
  2. I make over $100,000/yr and my adjusted gross income precludes standard IRA contributions. ...

    With an adjusted gross income (AGI) of more than $100,000, only your eligibility to deduct contributions to a Traditional ... Read Answer >>
Related Articles
  1. Retirement

    401(k) Contribution Limits in 2016

    Find out what the contribution limits are for 401(k) retirement savings plans in 2016, including individual, employer and aggregate limits.
  2. Retirement

    IRA Contributions: Eligibility And Deadlines

    Use this checklist for contribution requirements to make your payments on time.
  3. Retirement

    How To Save More For Your Retirement

    The Economic Growth and Tax Relief Reconciliation Act of 2001 made it easier to prepare for the future. Will you be ready?
  4. Retirement

    How Much Can You Contribute to Your 401(k)?

    Given the fairly high compensation limits on these retirement plans, most workers can pitch in more than they currently do.
  5. Retirement

    Which Retirement Plan Is Best?

    We'll show you how to choose between Roth IRAs, Traditional IRAs and 401(k)s.
  6. Retirement

    The Best Retirement Plans For Millennials

    Retirement is decades away, but if you make yourself start saving even a little now, all that time can make your money grow big time. Two smart options.
  7. Retirement

    The 4 Essential Elements of a Retirement Plan

    Learn about the four essential elements of an effective retirement plan, including maximizing your contributions and understanding your investment options.
  8. Retirement

    How To Correct Ineligible (Excess) IRA Contributions

    Eager to save for retirement? Learn how to avoid overpayment penalties.
RELATED TERMS
  1. IRS Publication 590: Individual Retirement Arrangements (IRAs)

    A document published by the Internal Revenue Service (IRS) that ...
  2. Savings Incentive Match Plan For Employees Of Small Employers - SIMPLE

    A retirement plan that may be established by employers, including ...
  3. 401(k) Plan

    A qualified plan established by employers to which eligible employees ...
  4. IRA Plan

    A plan that individuals may establish to arrange and plan for ...
  5. Roth IRA

    A Roth IRA is an individual retirement plan that bears many similarities ...
  6. Retirement Contribution

    A monetary contribution to a retirement plan. Retirement contributions ...
Hot Definitions
  1. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  2. Derivative

    A security with a price that is dependent upon or derived from one or more underlying assets.
  3. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  4. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
  5. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
  6. Retained Earnings

    Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested ...
Trading Center