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Who Can't Contribute to Retirement Accounts

Emily Brandon

To reap the many benefits of a retirement investment account, you have to participate, and many people don't. Workers who report that they don't participate in a 401(k), individual retirement account or traditional pension (46 percent) are much more likely to say they feel "not at all confident" about their financial security in retirement than those who use one or more of these types of retirement benefits (11 percent), according to a recent Employee Benefit Research Institute survey. However, there are a few groups of people who are shut out of the retirement system or limited in their ability to participate for a variety of reasons, including their age, income or lack of workplace retirement benefits. Here's a look at who doesn't have access to retirement accounts:

Those without a 401(k) at work. If your employer doesn't offer a 401(k) plan, you typically miss out on a huge opportunity to save money on your taxes while saving for retirement. Most people who don't have access to a 401(k) account at work can still contribute to an IRA, but the contribution limits are much lower. While workers can defer taxes on up to $17,500 using a 401(k) ($23,000 for those age 50 and older), they can only defer taxes on $5,500 using an IRA ($6,500 at age 50 or older). There's also no match with IRA accounts or other types of employer contributions.

Workers who earn more than the income limits. If you have a 401(k) or similar type of retirement account at work, you won't be able to also contribute to an IRA if you earn too much. The tax deduction for traditional IRA contributions is phased out for people with workplace retirement accounts whose modified adjusted gross income is between $60,000 and $70,000 in 2014 ($96,000 and $116,000 for couples). Individuals without a 401(k) who are married to someone with one lose the IRA tax deduction if the couple's income is between $181,000 and $191,000. You have until April 15 to make IRA contributions that count for the previous tax year, so some people wait to make sure their AGI is within the cutoffs before making an IRA contribution. These income limits are typically adjusted for inflation each year.

[See: What Everyone Should Know About IRAs .]

For Roth IRAs, the AGI phaseout range is $114,000 to $129,000 for singles and heads of household and $181,000 to $191,000 for married couples, but those who earn more may still be able to convert traditional IRA assets to a Roth. "If you are a high-income earner and you make too much to contribute to an outright Roth, consider a backdoor Roth," says Maria Bruno, a certified financial planner and senior investment analyst at Vanguard. "You can use the contribute-and-convert strategy."

People over age 70½. You can no longer get a tax deduction for traditional IRA contributions in the year you turn 70½ or older. So those born on June 30, 1943, or earlier can no longer defer taxes on an IRA contribution. There aren't any upper age restrictions on 401(k) participation, but employers are allowed to exclude employees under age 21 and those without at least one year of service from the retirement plan.

[See: 9 Important Ages for Retirement Planning .]

Investors without earned income. To participate in an IRA, you need to have earned income from working. Potential sources of income that make you eligible to participate include wages, salaries, tips, professional fees, bonuses, commissions and earnings from self-employment. You can also open a traditional or Roth IRA in a child's name when they get their first part-time job. "The child has to have earned income," says Johanna Turner, a certified financial planner and partner at Milestones Financial Planning in Mayfield, Ky. "My two boys were lawn-mowing age the year Roths were introduced, so they had Roth IRAs from the very first year. The contributions came from me, which is also a nice little estate planning tool." However, you cannot contribute to an IRA if you don't have earnings from work. Interest, dividend, rental, pension or annuity income will not qualify you to make a tax-deductible IRA contribution.

[See: 10 Ways to Reduce Taxes on Your Retirement Savings .]

Workers with no disposable income. Of course, the biggest thing preventing many people from saving for retirement is simply not having enough money left over after paying bills to put something aside for retirement. However, the benefits of contributing even a small amount to a retirement account can be huge. For example, a worker in the 15 percent tax bracket who puts $500 into an IRA will save $75 on his federal tax bill and is likely to get an additional tax deduction on his state tax bill. Plus, if this worker's income is low enough to qualify for the saver's credit, he could additionally get a tax credit worth 10, 20 or 50 percent of the amount contributed up to $2,000 ($4,000 for couples). "If you put some money aside, you get a break on your taxes to help put some of the money back into your pocket," says Jackie Perlman, a principal tax research analyst for The Tax Institute at H&R Block. "Even if you made a Roth IRA contribution, which is not deductible, you would still get to claim this credit."

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