Does any participation in an employer sponsored plan make one ineligible to participate in a self-directed IRA?
Question: I have two part-time jobs. 95% of my wages are generated at job #1 where no 401K plan is offered. I work infrequently at part-time job #2 where a 401K plan is offered and I have participated in the plan. I will only accumulate a couple hundred dollars in taxable wages in 2017 from job #2, and will therefore contribute less than $50 to the 401K plan. Given that, I would like to opt out of the 401K plan and contribute to a self-directed IRA based on the sum of my wages from both jobs. THE PROBLEM. In 2017 I have worked at job #2 and had tax deductible contributions allocated to the employer sponsored 401K plan (the amount is less than $20). Since I have already participated in this plan in 2017 is there a way to have my employer or sponsor ‘recall’ those funds from the employer based 401K account? Then I will not have participated in any employer sponsored plan in 2017 making me eligible to participate in a self-directed IRA.?
Answer from our Boston Tax Planner:
Based on my tax research resources, the short answer is participation in an employer plan will make you ineligible for a tax-deductible IRA in the same year.
An employee is covered by an employer retirement plan for a tax year if the employer has a:
• Defined contribution plan (profit-sharing, 401(k), stock bonus, or money purchase pension plan) and any contributions or forfeitures are allocated to the employee’s account for the tax year.
• IRA-based plan (SEP, SARSEP, or SIMPLE IRA) and the employee has an amount contributed to the IRA for the tax year. • Defined benefit plan (403(b) annuity, cash balance, or plans for federal, state, or local government employees, other than section 457(b) plans) and the employee is eligible to participate within the tax year. An employee is covered even if he or she declines to participate, does not make a required contribution, or does not perform the minimum service required to accrue a benefit for the year.
No vested interest: If any amount is allocated to or a benefit accrues to an employee’s account, the employee is covered by that plan even if he or she has no vested interest in (legal right to) the account.
If it’s early in the year, you may be able to talk with your employer about withdrawing from the plan, taking the deferred contribution as income and adjusting your payroll records so that Box 13 on your 2017 W2 will not be checked. That is an operations issue you’ll need to refer to the payroll and 401k administrator. (I personally doubt that an employer would allow such a ‘recall’).
On the other hand, you may still consider a contribution to a non-deductible traditional IRA. It would need to be coded this way with the custodian and reported on your taxes to account for basis (and future tax issues). So if you can’t successfully ‘recall’ funds, consider the non-deductible route.
And depending on your income, you may want to consider a Roth IRA contribution instead. This will provide for ‘tax diversification’ in the future since the funds can be withdrawn without having to pay any income taxes on accrued gains, dividends and interest.
You really should consider having a good tax advisor as part of your team even if you are planning to direct your own investments.
Steve Stanganelli is a Fee-Only Certified Financial Planner™ Professional NAPFA-Registered Financial Advisor, and Accredited Estate Planner® at Clear View Wealth Advisors, LLC. He has been providing financial, tax, retirement, and college funding advice for more than 20 years. For more information, email: Steve@ClearViewWealthAdvisors.com