Q:

Subject: 401k Contributions (After-the-Fact)

 

Kerry,

 

I have just finished our tax return for 2005.  We owe $1,500 to the feds and $2,300 to the state (CA.).  I did notice (on our W2s) that both (my wife and I) are below the limit ($14,000) in our 401k contributions for the period.

Are we allowed to send these institutions additional funds in order to reduce our tax liability?  Or can we contribute to our IRA's at our Bank in order to reduce our liability?

Please advise.

Regards,

A:

You should be working with a tax pro on matters such as this.

401k contributions are only allowed during the year in which you are being paid because they are intended to be made directly from your paychecks and reduce the taxable income for that particular year. The time to increase your 2005 contributions was before 12/31/05 through your employer's payroll department.  Your 2005 W-2, where 401k contributions have their effects is locked in and you have to live with it.

Deductions for conventional IRAs are very small or nonexistent for people who have an employer sponsored retirement plan (including 401k) who are considered to be evil rich by our rulers in DC.  For 2005, the IRA deduction starts being phased out for couples when their Modified Adjusted Gross Income (MAGI) is $70,000 and is completely gone when MAGI reaches $80,000.  You didn't say what your AGI is, but there's a good chance that you are over those limits.

You also have the possible options of making nondeductible contributions to traditional or Roth IRAs; but neither of those would reduce your tax bills.

You can see more specific details in IRS's Pub 590.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/10/2006 11:29:00 AM Send this post: