Personal finance Q&A: How much of IRA contribution is tax deductible?

Dear Liz: I am changing jobs because of a layoff. I contributed to my former employer’s 401(k) to the extent possible. My new employer also offers a 401(k), but I won’t be eligible for a year.

I want to use an IRA in the meantime. I do not understand how I should answer the question on the tax form about whether my employer offers a retirement plan when I am determining how much of my IRA contribution I can deduct. My employer does, obviously, but I can’t participate yet. Advice, please?

Answer: You’re smart to continue your retirement savings while you wait to become eligible for the new employer’s 401(k). Missing even one year of contributions could cost you tens of thousands of dollars in lost retirement income.

When you’re not covered by an employer plan, all of your contribution to an IRA is typically deductible.

When you are covered, your contribution’s deductibility is subject to income limits. In 2015, the ability to deduct an IRA contribution phases out between modified adjusted gross incomes of $61,000 to $71,000 for singles and $98,000 to $118,000 for married couples filing jointly.

To be considered covered by an employer plan, you have to be an active participant, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. That means money has to be put into your account by you or your employer or both.

Here’s the twist: You’re considered covered for the whole tax year if you participated in a plan during any part of that year. So the IRS will consider you an active participant for 2015 because you were contributing to your former employer’s plan for part of this year.

If you start contributing to your new employer’s plan when you become eligible next year, you’ll be considered covered for 2016 as well.

You could decide not to contribute to the new employer’s plan until 2017 to preserve your IRA’s deductibility, but it probably makes more sense to start contributing to the new plan to get both the tax break and any match.

If your contribution to an IRA isn’t deductible, consider making a contribution to a Roth IRA instead.

In retirement, withdrawals from a regular IRA will be subject to income taxes while withdrawals from a Roth IRA will be tax free. In 2015, your ability to contribute to a Roth phases out between modified gross incomes of $116,000 to $131,000 if you’re single and $183,000 to $193,000 if you’re married.

Why credit scores change

Dear Liz: My Discover card started including a complimentary credit score with my statement. My first report was 840. Each month since has been lower.

Two months ago it was 812 and the last one was 800. I have not applied for any new loans, cards or other credit. My limit on this card is $4,000, and I never charge more than $500 each month, which is paid in full. Why does my number keep dropping when I’m doing nothing different?

Answer: You may not be doing anything different, but the underlying information used to create your credit scores changes all the time.

The company that creates the leading credit scoring formula, FICO, says 8 of 10 people experience changes to their FICO scores by up to 20 points from month to month.

One factor that typically changes: the balances reported by your creditors. The fact that you pay your credit card in full is wise, but irrelevant to your scores.

The balances transmitted to the credit bureaus and used to calculate your scores may be the balances from your last statement, or from a random date in the previous month. If you have other credit accounts and loans, the balances from those factor into your scores as well.

Other things can also change. For example, an old, closed account may “fall off” your credit report, which could affect your credit utilization (how much of your available credit you’re using) as well as the average age of your credit accounts.

Also, every month your active accounts get older, which is typically a positive factor.

So you’ll see changes even when you’re looking at the same type of score from the same credit bureau.

You would see even more variation if you could see all your scores, since lenders use various formulas and pull scores from three credit bureaus.

Although the FICO score is the leading formula, that doesn’t mean the FICO you’re seeing is the FICO a particular lender is using. The lender may use a newer or older version of the formula — or one tweaked to the auto lending or credit card industry, for example.

You don’t have much to worry about, in any case. Scores over 800 indicate that you’re quite unlikely to default, so lenders should give you their best rates and terms if you do decide to apply for credit.

Questions may be sent to Liz Weston, 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com. Distributed by No More Red Inc.