IRA limits w 401k

[kpangelinan]

In Pub 590, for 2010, phase out limits for individuals covered by employer sponsored plans are different than phase out limits for individuals not covered by these plans. If someone chooses not to enroll in a 401k plan offered by their employer, would they be considered "not covered" by their employers plan based on Pub 590?

http://www.irs.gov/retirement/participant/article/0,,id=188232,00.html

Can a single person that chooses not to enroll in a 401k plan offered by their employer contribute to a traditional IRA and deduct up to $5000 regardless of their earned income? (The reason for this is that the 401k plan has no matching or other advantages other than the higher limits, which are not an issue in this case.)

[snowshine]

No!
If an employee is eligible to participate in a retirement plan at work then they are "Active Participants," and must live with the lower contribution limits for Traditional IRAs. This does not change Roth IRA or non-deductible contributions to Traditional IRAs of course.

[Burke]

I believe that is incorrect. While it used to be true, the TP is no longer considered an active participant IF they made no contributions during the entire year AND the employer made no contributions of any kind into the account in that same tax year. In that case, instructions for completing the W-2 state the "retirement plan" box is not to be checked. Some still do it however.

[kpangelinan]

W2 instructions page 12

I believe that is incorrect. While it used to be true, the TP is no longer considered an active participant IF they made no contributions during the entire year AND the employer made no contributions of any kind into the account in that same tax year. In that case, instructions for completing the W-2 state the "retirement plan" box is not to be checked. Some still do it however.

Burke, you're the man! You are correct, however, I wanted to mention, for anyone reading that one could be an active participant if they were eligible for a defined "benefit" plan even if they didn't contribute, BUT NOT if there were no contributions to a 401k plan or any defined "contribution" plan.

Thanks again,

This board is great and I love my Tax Book!