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July 2002

Q. If I participate in an employer-sponsored or other qualified retirement plan, does that affect the amount of my IRA contributions that are tax-deductible?

A. Q. If I participate in an employer-sponsored or other qualified retirement plan, does that affect the amount of my IRA contributions that are tax-deductible? A. If you or your spouse is an "active participant in a qualified plan," the government limits the amount of your IRA contributions that are tax-deductible. The limit is based on your Adjusted Gross Income, or "AGI" (see www.ira.com/glossary.htm for definition of terms). In accordance with recent tax revisions, the limits will be changing for each of the next few tax years.

In general, the greater your AGI, the less you are eligible to deduct. The deduction is gradually phased out, until those with the higher AGIs are ineligible for any tax-deductible IRA contributions. There is a formula to calculate the amount by which your deduction is reduced, but it is somewhat complicated -- you may want to consult a qualified tax professional if you are affected by the phase out. Also, additional computations and income adjustments must be made if you are receiving Social Security benefits and hope to make a tax- deductible contribution to an IRA.

If you are a single taxpayer who actively participates in a qualified plan, the phase-out levels for tax-deductible IRA contributions are as follows:

Tax YearAGI Phase Out
2001$33,000 - $43,000
2002$34,000 - $44,000
2003$40,000 - $50,000
2004$45,000 - $55,000
2005+$50,000 - $60,000

If you are married, file jointly, and are an active participant in a qualified plan, the phase-out limit is based on your combined AGI. See the table below.

Tax YearCombined AGI Phase Out
2001$53,000 - $63,000
2002$54,000 - $64,000
2003$60,000 - $70,000
2004$65,000 - $75,000
2005$70,000 - $80,000
2006$75,000 - $85,000
2007+$80,000 - $100,000

Under certain circumstances, it is possible for the spouse who is not an active participant in a qualified plan to make a deductible contribution, which is affected by a combined AGI phase-out range between $150,000 and $160,000.

If you are married and file separately, the deduction amount still may be reduced for both you and your spouse if one of you actively participates in a qualified plan. If either of you actively participates in a qualified plan and if either of you has an AGI above $10,000, no part of an IRA contribution is tax deductible for either spouse.

Marital status is determined at the end of the year, so if a person obtains a divorce during the year, he or she would not be affected by their spouse's participation in a qualified plan. Also, spouses who have lived apart for the entire year and file separately may be treated as unmarried.

**SPECIAL NOTE: The above is provided for information purposes only, and is not to be construed as specific tax advice. A qualified professional should be consulted before implementing any financial or tax-planning strategy.




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