If your filing status is married jointly and your modified adjusted gross income (MAGI) is less than $89,000 then you and your spouse can each make deductible IRA contributions of up to $6,000 if both of you are over age 50.
You are correct that any amount you defer to your 401(k) pre-tax will reduce your MAGI. If your MAGI is $89,500 then you will only be able to deduct $5,850 each because you are slightly over the $89,000 limit. If you defer an extra $500 then you can deduct the full $6,000.
You are correct that you can only rollover to an IRA if the plan permits in-service withdrawals at your age. Most plans do not permit in-service withdrawals prior to age 59 1/2. Also, the plan does not have to provide in-service withdrawals even at age 59 1/2. When you can take a distribution will be explained in the summary plan description (SPD).
http://www.irs.gov/retirement/participant/article/0,,id=202516,00.html
Each of you can contribute $6,000 (for a total of $12,000) based on your earnings from working (spousal limit). MAGI is before subtracting itemized deductions on Schedule A. Yes, my answer is based on 2009 rules.
See page 11 for "Spousal Limit", Worksheet 1-1 for MAGI on page 17 and Worksheet 1-2 for deductible amt on page 19 - http://www.irs.gov/pub/irs-pdf/p590.pdf - As this Pub is for 2008, he MAGI limit would be increased from $85,000 to $89,000 for 2009.
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