The traditional IRA and deductibility

Your Guide to State, Local, Federal, Estate + International Taxation

traditional IRA, retirement, savings, tax, deductionTraditional IRAs are a great way to lower your taxable income and save for retirement. For 2016, you can contribute up to $5,500 to a traditional IRA plus an additional $1,000 if you’re age 50 and older. In order to contribute to an IRA, you must have “earned income”. Generally speaking, this is earnings from employment but also includes alimony. Your IRA contribution cannot exceed the amount of your earned income. A non-working spouse is permitted to use the earnings of the working spouse in determining their contribution amount as long as a joint return is filed. There are additional rules, however, that govern whether traditional IRA contributions are tax deductible.

If you are single and are not covered by an employer retirement plan, you can deduct your traditional IRA contribution regardless of how much money you earn. If you are covered by an employer retirement plan, you can still deduct all of your IRA contribution, provided that your modified adjusted gross income (MAGI) is $61,000 or less. Between $61,000 and $71,000, the IRA deduction limit phases out. Beyond $71,000, your contribution is not deductible.

If you are married, different income limits apply when you or your spouse are covered by an employer retirement plan. If you are covered, you can fully deduct your contribution as long as your joint MAGI does not exceed $98,000. The phase out is between $98,000 and $118,000. Beyond $118,000, your contribution is not deductible. If you are not covered by a retirement plan through work but your spouse is, the joint MAGI limit rises to $184,000 with complete phase out occurring at $194,000. If neither spouse is covered by a workplace retirement plan, contributions are fully deductible by both spouses regardless of MAGI. The deduction for a married taxpayer filing separately phases out between $0 and $10,000 if either spouse is covered by an employer retirement plan. Therefore, no deduction is permitted once their separate MAGI’s exceed $10,000. On the other hand, there is no MAGI limit if neither spouse is covered by an employer retirement plan. A married taxpayer that files separately and did not live with their spouse at any time during the year is treated as being single in determining deductibility.

There are several important things to keep in mind when it comes to traditional IRAs:

  1. Contributions can still be made even if they are not deductible. This will, however, entail additional work/effort in tracking these contributions.
  2. Different rules apply to Roth IRAs.
  3. The deadline for making IRA contributions for 2016 is April 18, 2017. Please note that this is still the deadline even if you file for an extension.

Ron Greenfield, CPA