Here are 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.
First, some of the contribution rules that apply to participant contributions for traditional IRAs.
For any tax year, you may be able to claim a deduction on individual federal income tax for the money you contribute to your IRA. See below for the limits for 2019 and 2020.
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.
IRA participant contributions for a specific tax year must be made by Apr. 15 of the following year, the date that taxes for the previous year are due. If Apr. 15 falls on a weekend or other holiday, the deadline is the next business day. For tax year 2020 it will be Wed., Apr. 15, 2020. 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 tax year can be made at any time between Jan. 1 of that year and Apr. 15 (or whatever that year's tax deadline is) of the following year, even if you filed your income-tax return before the Apr. 15 tax deadline. 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.
You may not make a participant contribution to a traditional IRA starting from the year you attain age 70½. You may, however, make a contribution for the preceding year. For example, if you reach age 70½ in 2020 you are not allowed to make a contribution for the 2020 tax year; however, you could make a contribution between Jan. 1 and Apr. 17, 2020, for the 2019 tax year.
Indicate Tax Year on Check
If you are one of the many taxpayers who will take advantage of the 3½-month extension (i.e. the deadline of Apr. 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," as the IRS puts it).
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 2019 may be made in 2020.
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. For a 401(k), you (or your spouse) are considered an active participant in years when you contribute to the plan.
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?
Note that these thresholds change every year. The following limits applied to tax years 2019 and 2020. The limit on traditional IRA contributions for 2019 and 2020 is $6,000 a year, or $7,000 per year if you're over 50 years old.
If You Are Filing Singly
For singles the maximum tax-deductible contribution starts shrinking once your modified adjusted gross income (MAGI) reaches $64,000. Singles with adjusted incomes of $74,000 and above are not eligible for the tax deduction. In 2020 those limits go up to $65,000 and $75,000.
If You Are Married Filing Jointly
This is where things get complicated. For those married filing jointly, the maximum tax-deductible contribution differs significantly if one person is contributing to a 401(k) and also can be limited for higher-income couples.
- If the spouse making the IRA contribution is covered by a workplace retirement plan, the deduction begins phasing out at $103,000 in adjusted gross income and disappears at $123,000 for 2019 (make that $104,000 and $124,000 for 2020).
- If the IRA contributor doesn’t have a workplace plan but his or her spouse does, the 2019 limit starts at $193,000, and no tax deduction is allowed once the contributor’s income reaches $203,000. (For 2020, those numbers are $196,000 and $206,000.)
If You Are Married Filing Separately
For taxpayers in the married filing separately category, the tax deduction limits are drastically lower, regardless of whether they or their spouses participate in an employer-sponsored retirement plan. If your income is less than $10,000, you can take a partial deduction. Once your income hits $10,000, you don’t get any 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 only a partial deduction may consider making a non-deductible contribution to a traditional IRA or a contribution to a Roth IRA (if they meet the income qualifications).
The Bottom Line
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.