The primary benefits of contributing to an IRA are the tax deductions, the tax-deferred or tax-free growth on earnings, and, if you are eligible, the nonrefundable tax credits. To get the most out of contributing to your IRA, it’s important to understand what these benefits mean and the limitations placed on them.
Receiving a Tax Deduction
If you do not participate in an employer-sponsored plan, such as a SEP IRA, SIMPLE IRA, or qualified plan, contributions to your traditional IRA may be tax deductible. However, if you participate in any of these plans, you may be considered an active participant, and the deductibility of your contributions would be determined by your modified adjusted gross income (MAGI) and your tax-filing status—that is, whether you file “married filing separately,” “married filing jointly,” or “single.”
If your traditional IRA contribution is not deductible, you may still make a nondeductible IRA contribution to it. Alternatively, you may contribute to a Roth IRA, provided your MAGI satisfies the Roth IRA eligibility limits for 2019, which are as follows:
|MAGI and Contribution Limits for Roth IRAs for 2019|
|Filing Status||MAGI LImit||Roth IRA Contribution Limit|
|Married Filing Jointly||Less than $193,000||$6,000 per person plus $1,000 catch-up contribution per person for people age 50 and up|
|$193,000 to $202,999||Partial contribution|
|$203,000 or more||No contribution allowed|
|Married Filing Separately||$0||$6,000 plus $1,000 catch-up contribution for people age 50 and up|
|$1 to $9,999||Partial contribution|
|$10,000 or more||No contribution allowed|
|Single||Less than $122,000||$6,000 plus $1,000 catch-up contribution for people age 50 and up|
|$122,000 to $136,999||Partial contribution|
|$137,000 or more||No contribution allowed|
If your income falls between the ranges that allow only a partial contribution, you may use a special formula to determine that partial contribution. This IRA calculator will further help you determine if you’re eligible for an IRA.
If you are married but lived apart from your spouse for the entire year, you are not treated as married for tax-filing purposes and must file in the “single” category.
Should you decide to make a nondeductible contribution to your traditional IRA, be sure to file IRS Form 8606, which helps you and the IRS keeps track of the nontaxable balance in your traditional IRAs, ensuring that you do not pay taxes on distributions that should be tax free.
Splitting Your Contribution
Splitting your contribution between your traditional and Roth IRA may be beneficial in certain circumstances:
- You are eligible for only a partial deduction on your traditional IRA. Instead of contributing the nondeductible amount to a traditional IRA, where earnings grow tax deferred, you can contribute the amount to a Roth IRA, where earnings grow tax free.
- You are eligible for only a partial Roth IRA contribution. To maximize your contribution for the year, you can contribute the difference to your traditional IRA.
Note that your combined contributions to your Roth and traditional IRAs should not exceed the IRA contribution limit, which for 2019 is $6,000 for people who are under 50; for those who are 50 or older, a catch-up contribution of $1,000 is allowed.
Make sure to find out if you are eligible for the IRS’s Saver’s Credit, which can amount to up to 50% of your IRA contribution but is topped off at $1,000.
You may be eligible for a nonrefundable tax credit of up to 50% of your IRA contribution, not exceeding $1,000, depending on your adjusted gross income and tax-filing status. Here are the tax credits that are allowed for combinations of particular income ranges and tax-filing statuses:
|Credit Rate||Married and files a joint return||Files as head of household||Other category of filers|
|50%||Up to $38,500||Up to $28,875||Up to $19,250|
|20%||$38,501 – $41,500||$28,876 – $31,125||$19,251 – $20,750|
|10%||$41,501 – $64,000||$31,126– $48,000||$20,751 – $32,000|
|0%||More than $64,000||More than $48,000||More than $32,000|
This nonrefundable tax credit is allowed in addition to any deduction you may receive for your IRA contribution.
In order to claim the nonrefundable tax credit, you must file IRS Form 8880, the most current version of which is available at www.irs.gov.
The Bottom Line
As the earnings in your traditional IRA grow on a tax-deferred basis—and on a tax-free basis in your Roth IRA—you have plenty of reasons to contribute to an IRA, along with the benefits discussed above. However, you may want to consult with your financial advisor to determine whether your savings should be directed to other vehicles.
For instance, if you receive a matching contribution in a 401(k) plan, it generally makes better financial sense to contribute the amount necessary to receive the maximum match—and then only contribute to an IRA if you can still afford to do so. In addition, consult with your tax professional for assistance in determining your eligibility and deductibility.