In this article, we focus on the benefits of making contributions to your Traditional IRA and the guidelines that determine whether or not you are able to take a tax deduction for those contributions.

Tutorial: Traditional IRA

First let\'s review some of the contribution rules that apply to participant contributions for Traditional IRAs.

Contribution Limit

For any tax year, you may contribute the lesser of the regular contribution limit or 100% of your taxable compensation (or earned income). If you reach age 50 by the end of a year, you may contribute an additional amount as a catch-up contribution. Here is a chart outlining contribution limits for some tax years:


Spousal IRA Contribution
You may contribute to a spousal IRA on behalf of your non-working spouse. The limits discussed above apply. Remember that if you also contribute to an IRA for yourself, both IRAs must be maintained as separate accounts, as IRAs cannot be held jointly. Of course, in order for you to make a spousal IRA contribution, you and your spouse must file a joint income tax return. Your combined contribution should not be more than the amount of taxable compensation you report on your tax return. (For more, check out Making Spousal IRA Contributions.)

Contribution Deadline
IRA participant contributions must be made by Apr 15. If Apr 15 falls on a weekend, the deadline is the next business day. Contributions postmarked on or before Apr 15 are considered to be made by the deadline.

Making Your Contribution After You File Your Tax Return
Your IRA contribution for the year can be made at any time between Jan 1 of that year and Apr 15 of the following year, even if you filed your income-tax return before April 15 Should you decide to make your contribution after you file your tax return, be sure to inform your tax professional so that if the contribution was not included on your return an amended return that includes the contribution can be filed.

Age Restriction
You may not make a participant contribution to a Traditional IRA starting from the year you attain age 70.5. You may, however, make a contribution for the preceding year. For example, if you reached age 70.5 in 2012, you are not allowed to make a contribution for the 2012 tax year; however, you could make a contribution between January 1 and April 15, 2012, for the 2011 tax year.

Indicate Tax Year on Check

If you are one of the many taxpayers who will take advantage of the 3.5-month extension (i.e. the deadline of April 15) to make an IRA participant contribution for the preceding year, be sure to indicate the applicable year on your check or any accompanying contribution form. If you do not provide this information your IRA custodian/trustee will not be able to determine the year for which you want the contribution to be made and will therefore likely report the contribution for the tax year in which they receive the check.

Deducting Your Traditional IRA Contribution

Being able to take a tax deduction for a contribution to your Traditional IRA depends on several factors, namely your modified adjusted gross income, your tax-filing status and your participant status (i.e. whether or not you are considered an active participant).

Active Participant Defined
Generally, your active-participant status depends on whether or not you participate in an employer-sponsored retirement plan. An employer-sponsored plan includes defined benefit plans, money-purchase or target-benefit plans, profit-sharing plans, 401(k) plans, SEP IRAs and SIMPLE IRAs. The rules vary among the different plans. For example, you are considered an active participant in a profit-sharing plan for the year your employer deposits the contribution to your retirement account, even if the contribution is being made for a different year. (Employers have until their tax-filing deadline plus extensions to make contributions; therefore, a contribution for 2010 may be made in 2011.) For participation in a money purchase pension plan, you are considered an active participant for the year you are entitled to receive the contribution, regardless of when the contribution is made.
Your employer should indicate if you are an active participant, by checking the "Retirement Plan Box" on your Form W-2. If you are unsure of your status, check with your employer or your tax professional.
If you are married and neither you nor your spouse is an active participant, you may take a tax deduction for the full contribution amount. If one of you is an active participant, then your income and tax filing status determines whether or not you are allowed to take a tax deduction for the contribution.


So Can You Deduct Your Contribution?
Use the following chart as a guideline to determine if you are able to get a tax deduction for the amount you contribute. Note that these thresholds change every year. The following limits applied to tax year 2008.

Traditional IRA Deductibility Limit For 2011
Tax Filing Status Active Participant Status Modified Adjusted Gross Income Deduction Allowed
Single or Head of Household Individual is not active No limit Full deduction
Individual is active $56,000 or less Full deduction
More than $56,000 but less than $66,000 Partial deduction
$66,000 or more No deduction
Married Filing Jointly Individual is not active, Individual\'s spouse is not active No limit Full deduction
Individual is active $90,000 or less Full deduction
More than $90,000 but less than $110,000 Partial deduction
$110,000 or more No deduction
Individual is not active, Individual\'s spouse is active $169,000 or less Full deduction
More than $169,000 but less than $179,000 Partial deduction
$179,000 or more No deduction
Married Filing Separately Individual is not active, Individual\'s spouse is not active No Limit Full deduction
Individual is active *1 $10,000 or less Partial deduction
$10,000 or more No deduction
Individual is not active, Individual\'s spouse is active *2 $10,000 or less Partial deduction
$10,000 or more No deduction
*1. If you and your spouse did not live together at any time during the year, then you are considered "single" for tax-filing purposes and should use the guidelines for a single taxpayer.
*2. If you and your spouse did not live together at any time during the year, you are allowed a full deduction.


If you are allowed only partial tax deduction, your tax professional should be able to help you calculate your deductible amount. Taxpayers who are not allowed a deduction or a partial deduction may consider making a non-deductible contribution to the Traditional IRA or a contribution to a Roth IRA.

Conclusion
Many factors determine the decisions a taxpayer makes about saving for his/her retirement, and whether a contribution is deductible is only one of these factors. What may be ideal for another person may not be ideal for you. As such, you want to work with a financial planner and/or retirement consultant to ensure that you make the choices that are suitable for your retirement profile. (For related reading, check out Turn Small Savings Into A Big Nest Egg.)

Related Articles
  1. Retirement

    Strategies for a Worry-Free Retirement

    Worried about retirement? Here are several strategies to greatly reduce the chance your nest egg will end up depleted.
  2. Professionals

    Your 401(k): How to Handle Market Volatility

    An in-depth look at how manage to 401(k) assets during times of market volatility.
  3. Professionals

    How to Build a Financial Plan for Gen X, Y Clients

    Retirement is creeping closer for clients in their 30s and 40s. It's a great segment for financial advisors to tap to build long-term client relationships.
  4. Professionals

    Don't Let Your Portfolio Be Trump'd by Illiquidity

    A look at Donald Trump's statement of finances and the biggest lesson every investor can learn.
  5. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  6. Retirement

    Maxing Out Your 401(k) Is Profitable: Here's Why

    It's shocking, but most American workers (73%) have no 401(k) retirement funds. Start saving now to anchor your retirement.
  7. Professionals

    Top Questions to Ask When Choosing a Robo-Advisor

    Think a robo-advisor might be the right choice for you? Be sure to ask these questions first.
  8. Professionals

    Top Retirement Hack? Start with a Lifestyle Change

    Instead of going through the usual retirement planning steps, some people are focusing on fostering a lower cost lifestyle from the start.
  9. Forex Education

    A Day In The Life of A Professional Forex Trader

    The professional forex trader lives an affluent lifestyle but pays the price with many hours of research and market watching.
  10. Insurance

    Picking the Best Longevity Insurance

    What you need to know before buying a "reverse life" policy.
RELATED TERMS
  1. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  2. See-Through Trust

    A trust that is treated as the beneficiary of an individual retirement ...
  3. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  4. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
  5. Self Invested Personal Pension ...

    A tax-efficient retirement savings account available in Great ...
  6. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
RELATED FAQS
  1. Can you buy penny stocks in an IRA?

    It is possible to trade penny stocks through an individual retirement accounts, or IRA. However, penny stocks are generally ... Read Full Answer >>
  2. Can I use my IRA to pay for my college loans?

    If you are older than 59.5 and have been contributing to your IRA for more than five years, you may withdraw funds to pay ... Read Full Answer >>
  3. Can my IRA be used for college tuition?

    You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>
  4. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Contributions to IRA, Roth IRA, 401(k) and other retirement savings plans are limited by the IRS to prevent the very wealthy ... Read Full Answer >>
  5. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>
  6. What are the best ways to use your 401(k) without a penalty?

    The best way to use your 401(k) retirement savings account is to take normal distributions after you reach retirement age. ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!