September 1, 1997

Q. As is my custom, I funded this year's IRA with a $2,000 contribution in January. Two months later my employer began a 401(k) account for everyone, a godsend we all appreciate. My question is, how do I report this apparent double contribution on my tax return next year?

A.C., Lemon Grove, Calif.

A. There's no problem with making an IRA contribution now that you have become a member of a 401(k) program. But the 401(k) might mean that your IRA contribution is not deductible, or might not be fully deductible.

If you find that little or none of the contribution will be deductible, and for that reason wish you hadn't made it, you are allowed to withdraw the contribution at any time up to the federal tax filing deadline (including extensions).

Such a withdrawal must also include any earnings generated by the funds while they were in the IRA, and those earnings must then be reported as income on your tax return.

The only wrinkle, explained in the latest issue of J.K. Lasser's ``Your Income Tax 1997,'' is that ``if you are under age 59 1/2 years old and not disabled, the 10 percent premature withdrawal penalty applies to the withdrawn earnings.'' But since this is likely to be a small amount, the penalty will be accordingly small -- probably too little to worry about.

Of course, nondeductible contributions to IRAs are a splendid way of boosting retirement savings. While you lose the advantage of tax deductibility, the other big feature -- tax-deferred growth of your principal -- should be enough to convince you of its wisdom.

I have had many correspondents who avoid nondeductible contributions solely because the process of reporting tax liability upon withdrawal is considerably more complex than the process with an IRA containing entirely deductible contributions.

But I don't find the paperwork all that daunting. Moreover, the existence of nondeductible contributions means the ultimate tax bill will be lower.

Q. I'm 70 years old and still working. When I retire, I will not receive a monthly pension, but my contributions to the pension fund will be given to me as a lump sum subject to substantial tax. If I immediately put this money in an IRA, I understand the tax will be deferred. However, I also understand that withdrawals from an IRA must begin by age 70 1/2. Does this mean my lump-sum pension payment cannot be put into an IRA if I retire after age 70 1/2?

G.S., Hyde Park

A. Although people can't contribute to an IRA after age 70 1/2, the rules do allow the rollover of a lump sum such as you will have into an IRA, even if you have passed 70 1/2. But you'll want to be careful about the way the transfer is handled.

If the lump sum is given to you directly, your employer must withhold 20 percent of the amount. To avoid this, select the institution where you want the money to be held, and have the money transferred directly from your employer to the trustee.