Can I contribute to an IRA while I have a 401K?

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jcpct
Posts: 107
Joined: Mon Feb 03, 2014 11:41 am

Can I contribute to an IRA while I have a 401K?

Post by jcpct »

A month ago I did a backdoor Roth contribution. I first opened a traditional IRA, put in $6500 and immediately converted that to a Roth. Everything went well until I did my taxes (using TurboTax). Now I question if I was eligible to open the IRA to begin with. My AGI is above the limit to contribute directly to a Roth and I have a company 401K plan. When I Google'd this situation today it looks like I should not have opened and contributed to the traditional Roth in the first place. Can anyone confirm if this is correct? Appreciate any and all advice here.
HouseStark
Posts: 324
Joined: Mon Oct 15, 2012 2:31 pm
Location: Minneapolis, MN

Re: Can I contribute to an IRA while I have a 401K?

Post by HouseStark »

Yes, you are eligible to contribute to a Traditional IRA, if you have the earned income. You may not be eligible to deduct your IRA contribution. That is a different thing. But, if your intent was to do a backdoor Roth, then you don't care about deducting your TIRA contribution, anyway.
HouseStark
Posts: 324
Joined: Mon Oct 15, 2012 2:31 pm
Location: Minneapolis, MN

Re: Can I contribute to an IRA while I have a 401K?

Post by HouseStark »

You didn't mention whether you have any other Traditional IRAs other than the one you opened with your $6500 contribution. That would make a difference. The objective of a back door Roth contribution, is not to get an IRA deduction for the contribution, but to make a Roth contribution by getting around the income limitation rules for Roth contributions.
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Re: Can I contribute to an IRA while I have a 401K?

Post by DSInvestor »

Yes, you have taxable compensation from your job so you're allowed to contribute to Traditional IRA while contributing to a 401k. Roth IRA has a MAGI limit to determine eligibility for contribution. Traditional IRA has no income limit for contribution but has a MAGI limit to deduct the contribution if covered by an employer plan.

Note that the backdoor into Roth IRA combines two steps.
1) Traditional IRA contribution. Make sure you enter the 2013 IRA contribution as a 2013 Traditional IRA contribution.
2) Roth conversion. This is the step that moves the money from Traditional IRA into Roth IRA.

If turbotax is telling you that you're not eligible for Roth IRA contribution, you've entered the wrong type of IRA contribution. Change it to Traditional IRA. Turbotax will examine your tax situation, and if you've entered your W-2 correctly know that you were covered by an employer plan and determine that your Traditional IRA contributions are non-deductible due to your income. It will add form 8606 to track the non-deductible contribution (IRA basis).

The Roth conversion happened in calendar 2014 so it will not be handled by the 2013 tax return. You will get a 1099-R for 2013 next January showing the Roth conversion and you will enter the conversion on your 2014 tax return.
Last edited by DSInvestor on Sun Feb 23, 2014 4:35 pm, edited 1 time in total.
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Topic Author
jcpct
Posts: 107
Joined: Mon Feb 03, 2014 11:41 am

Re: Can I contribute to an IRA while I have a 401K?

Post by jcpct »

No others IRA's other than the Roth and I did this only to contribute to the Roth. I had no intention of the traditional IRA contribution itself being tax deferred. It was all after tax monies.
placeholder
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Joined: Tue Aug 06, 2013 12:43 pm

Re: Can I contribute to an IRA while I have a 401K?

Post by placeholder »

It's kind of the point of backdoor Roth otherwise you just contribute directly instead of that way.
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