IRA Contributions: Deductions and Tax Credits

How to take full advantage of the benefits

The primary benefits of contributing to an individual retirement account (IRA) are the tax deductions, the tax-deferred or tax-free growth on earnings, and if you are eligible, 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.

Key Takeaways

  • The benefits of contributing to an IRA include tax deductions, tax-deferred or tax-free growth on earnings, and tax credits if you're eligible.
  • The deductibility of your contributions is determined by your income and your tax-filing status.
  • You can make nondeductible IRA contributions even if your traditional IRA contribution isn't deductible.
  • Splitting your contribution between a traditional and Roth IRA can be a good move in certain circumstances.
  • A nonrefundable tax credit is available to eligible taxpayers who contribute to a traditional and/or Roth IRA or an employer-sponsored retirement plan.

Receiving a Tax Deduction

If you do not participate in an employer-sponsored plan, such as a 401(k), a SEP IRA, a SIMPLE IRA, or another qualified plan, contributions to your traditional IRA may be tax-deductible.

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 and your spouse file separately, you're married and file jointly, or you're a single filer.

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 the 2021 and 2022 tax years, which are as follows:

MAGI and Contribution Limits for Roth IRAs for 2021 and 2022
Filing Status 2021 MAGI Limit 2022 MAGI Limit Roth IRA Contribution Limit
Married Filing Jointly Less than $198,000 Less than $204,000 $6,000 per person plus $1,000 catch-up contribution per person for people age 50 and up
  $198,000 to $207,999 $204,000 to $213,999 Partial contribution
  $208,000 or more $214,000 or more No contribution allowed
Married Filing Separately $0 $0 $6,000 plus $1,000 catch-up contribution for people age 50 and up
  $1 to $9,999 $1 to $9,999 Partial contribution
  $10,000 or more $10,000 No contribution allowed
Single Less than $125,000 Less than $129,000 $6,000 plus $1,000 catch-up contribution for people age 50 and up
  $125,000 to $139,999 $129,000 to $143,999 Partial contribution
  $140,000 or more $144,000 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.

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 keep track of the nontaxable balance in your traditional IRAs, ensuring that you do not pay taxes on distributions that should be tax-free.

If you are married but lived apart from your spouse for the entire year, you must file in the single category.

Splitting Your Contribution

Splitting your contribution between your traditional and Roth IRA may be beneficial in certain circumstances:

  • If you are eligible for only a partial deduction on your traditional IRA. Instead of contributing the nondeductible amount to a traditional IRA, in which earnings grow tax-deferred, you can contribute the amount to a Roth IRA, in which earnings grow tax-free.
  • If 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.

Your combined contributions to your Roth and traditional IRAs should not exceed the IRA contribution limit, which for tax years 2020 and 2021 is $6,000 for people who are under 50. For those who are 50 or older, an additional catch-up contribution of $1,000 is allowed.

Saver’s Credit

Make sure to find out if you are eligible for the IRS’s saver’s credit. You qualify if you meet the following criteria:

  • You're over 18
  • You aren't claimed as a dependent on someone else's tax return
  • You aren't a student

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 (AGI) and tax-filing status. Below are the 2021 and 2022 tax credits that are allowed for combinations of particular income ranges and tax-filing statuses:

2021 Saver's Credit
Credit Rate Married and files a joint return Files as head of household Other category of filers
50% AGI up to $39,500 AGI up to $29,625 AGI up to $19,750
20% $39,501 - $43,000 $29,626 - $32,250 $19,751 - $21,500
10% $43,001 - $66,000 $32,251 - $49,500 $21,501 - $33,000
0% More than $66,000 More than $49,500 More than $33,000
2022 Saver's Credit
Credit Rate Married and files a joint return Files as head of household Other category of filers
50% AGI up to $41,000 AGI up to $30,750 AGI up to $20,500
20% $41,001- $44,000 $30,751 - $33,000 $20,501 - $22,000
10% $44,001 - $68,000 $33,001 - $51,000 $22,001 - $34,000
0% More than $68,000 More than $51,000 More than $34,000

This non-refundable 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 on the IRS website.

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 a 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.

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  1. Internal Revenue Service. "IRA Deduction Limits." Accessed Dec. 11, 2021.

  2. Internal Revenue Service. "2022 Limitations Adjusted as Provided in Section 415(d), etc.," Page 4. Accessed Dec. 11, 2021.

  3. Internal Revenue Service. "About Form 8606, Nondeductible IRAs." Accessed Dec. 11, 2021.

  4. Internal Revenue Service. "Retirement Topics - IRA Contribution Limits." Accessed Dec. 11, 2021.

  5. Internal Revenue Service. "Retirement Savings Contributions Credit (Saver’s Credit)." Accessed Dec. 11, 2021.