Eligible to deduct taxes via Traditional IRA?

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Bogle826
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Joined: Sat Mar 07, 2015 1:42 pm

Eligible to deduct taxes via Traditional IRA?

Post by Bogle826 »

My buddy works for a firm that offers 401k, but the 401K does not have company-match nor are the funds attractive.

He recently opened up a vanguard account and contributed $6k to his Traditional IRA. Is he allowed to use his $6k contribution to lower gross income for tax purposes? I read that if you have a retirement program at work, you can't use Traditional IRA contributions to deduct gross income for tax purposes? Salary is less than $65K.
dukeblue219
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Joined: Fri Jan 29, 2016 11:40 am

Re: Eligible to deduct taxes via Traditional IRA?

Post by dukeblue219 »

As you noted, depends on income. Have him examine https://www.irs.gov/retirement-plans/20 ... an-at-work

In that income range I'd really be looking hard at a Roth IRA first... if not already covered.

Edited to add that if he has not contributed a dollar this year in the 401k he may be eligible at higher incomes. See post below.
Last edited by dukeblue219 on Thu Mar 25, 2021 9:55 pm, edited 1 time in total.
Katietsu
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Joined: Sun Sep 22, 2013 1:48 am

Re: Eligible to deduct taxes via Traditional IRA?

Post by Katietsu »

dukeblue219 wrote: Thu Mar 25, 2021 6:39 pm As you noted, depends on income.
Except, that he is not considered an active participant in the 401k if he does not contribute to it. If this 401k is the only component of the retirement plan, he can guarantee his traditional IRA contribution is tax deductible by not putting anything into the 401k in a given year. I am not suggesting this is or is not the way to go but it is a reasonable possibility. He should look at box 13 on the W-2 to see how his employer is designating his participation.

In that income range I'd really be looking hard at a Roth IRA first... if not already covered.
If he is a single guy, this is the 22% tax bracket. I would stick with the traditional unless he was expecting a jump in earnings, a large inheritance or some other reason that would propel his income to a much higher marginal tax rate.
dukeblue219
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Joined: Fri Jan 29, 2016 11:40 am

Re: Eligible to deduct taxes via Traditional IRA?

Post by dukeblue219 »

Katietsu wrote: Thu Mar 25, 2021 6:55 pmhe is not considered an active participant in the 401k if he does not contribute to it. If this 401k is the only component of the retirement plan, he can guarantee his traditional IRA contribution is tax deductible by not putting anything into the 401k in a given year.
I stand corrected and will make a note to this effect in my original response.
tibbitts
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Re: Eligible to deduct taxes via Traditional IRA?

Post by tibbitts »

Bogle826 wrote: Thu Mar 25, 2021 6:36 pm My buddy works for a firm that offers 401k, but the 401K does not have company-match nor are the funds attractive.

He recently opened up a vanguard account and contributed $6k to his Traditional IRA. Is he allowed to use his $6k contribution to lower gross income for tax purposes? I read that if you have a retirement program at work, you can't use Traditional IRA contributions to deduct gross income for tax purposes? Salary is less than $65K.
Your buddy has to post his question himself, and some of the responses we've already seen illustrate exactly why. Retirement accounts often have nuanced rules, and if you give him bad information, he won't be your buddy any more. You won't get points because you consulted with Bogleheads.
mhalley
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Joined: Tue Nov 20, 2007 5:02 am

Re: Eligible to deduct taxes via Traditional IRA?

Post by mhalley »

The search for the absolute lowest ER in funds leads many people interpret reasonable fund ER’s as being outrageous. As is quoted often, “The greatest enemy of a good plan is the dream of a perfect plan”
The wiki states that a general rule of thumb is that investing in a 401k is better than investing in taxable until the fees exceed 1.7%.
At 65k salary, I think a Roth would be superior to a traditional IRA.
Point your friend to the irs website regarding trad ira deductibility.
https://www.irs.gov/retirement-plans/ir ... ion-limits
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