By Raymond S. Kulzick, CPA, DBA
As published in the Pinecrest Tribune. March 16, 1998. 

If I have a 401K at work, should I also have an IRA?

It's never too early to start saving for retirement, but retirement planning is a complex issue. Aggressive advertising by sellers of "investment products" can make it even more confusing, so here's some help. IRA contributions for 1997 can generally be made until April 15, 1998 and are limited to "regular" IRAs. The following guidelines exclude the new types of IRAs which are available only for 1998 and future years.

First, if you can afford it, save the maximum allowed in your 401K and the maximum in an IRA, even if it isn't all deductible. Be sure to keep enough liquid funds outside of retirement accounts to pay for emergencies.

If you cannot safely save the maximum, at least save enough through the 401K (or 403B if you work for government or a non-profit) to qualify for the maximum match from your employer. This matching amount is essentially "free" money, so why not take it!

Your second priority will vary depending on whether your IRA contribution will be deductible. If the contribution is deductible, usually an IRA is a better investment than a 401K because you have more control over your money and a wider range of investment choices. If your IRA contribution is not deductible, your second priority should be to contribute to the 401K to its maximum with pre-tax dollars.

Contributions to an IRA are limited to the lesser of $2,000 or earned income (if that income is less than $2,000). Effective in 1997, non-working spouses may also contribute up to $2,000 as long as the working spouse has earned income of at least $4,000. These limits are unaffected by whether either person participates in a qualified plan (like a 401K) where they work.

The amounts contributed to an IRA grow tax-free until they are withdrawn, and except in some special circumstances may not be withdrawn before age 59-1/2 without paying a penalty. "Regular" IRAs are taxable income (or, sometimes, partly taxable) when withdrawn.

IRA contributions may be deducted from Adjusted Gross Income (AGI) on your income tax return if you meet certain criteria:

· If you are 70-1/2 or older, you CANNOT deduct IRA contributions.

· If you (and your spouse, if married) were not covered by a retirement plan at work (or a SEP or Keogh if self-employed), you CAN make the deduction. Look at box 15 on all W-2s to see if you are covered at work.

· If you were covered by a retirement plan at work, your contributions ARE fully deductible if your modified AGI is less than $40,000 filing joint ($25,000 filing single). If your modified AGI is more than $50,000 ($35,000 if single) you may NOT deduct the IRA. Amounts in between are partially deductible and special rules apply to persons "married but filing separately." AGI limits are for 1997 tax returns and increase for 1998 and beyond.

Remember that whether the IRA contributions are deductible or not, IRAs are beneficial because they provide you with a high degree of control over your money, a wide range of investment choices, and the opportunity for your retirement savings to grow tax-free until retirement.

Raymond S. Kulzick is a CPA, and technology and management consultant with offices in Pinecrest at 12177 S. Dixie Highway. If you have questions or suggestions for future columns, please contact him at 305-233-2280 or rkulzick@kulzick.com. More information is also available on the firm's Web site at http://www.kulzick.com/businesspro.