Is a contribution to an individual retirement account (IRA) tax-deductible? For many of us, the short answer is: You bet! That's what IRAs are for!
But this is the Internal Revenue Service (IRS) we're talking about, so there are rules and limits. Roughly, your ability to deduct an IRA contribution in part or in full depends on how much you earn, whether you or your spouse are currently contributing to other qualified retirement plans, and what type of IRA it is.
- Contributions to a traditional IRA are deductible in the year during which they are made.
- There are upper income limits on deductibility.
- The taxes on contributions to a Roth IRA are paid up front.
First, a definition: The IRA is one of a number of retirement savings plans that are "qualified" by the IRS, meaning that they offer special tax benefits to the people who invest in them. For self-employed people, they are the main vehicle available for tax-deferred retirement savings.
If you have a traditional IRA, rather than a Roth IRA, you can contribute up to $6,000 in 2019 and you can deduct it from your taxes. You can add another $1,000 to that if you're aged 50 or above.
From there, you need to know the rules and limits.
If You Have Other Retirement Accounts
That $6,000 or $7,000 is the total you can deduct for all contributions to qualified retirement plans in 2019.
If you also have a 401(k), say, you can split your money between the two accounts but your total deductibility limit remains the same.
Which Type of IRA Do You Have?
Contributions to a traditional IRA, which is the most common choice, are deductible in the tax year during which they are paid. You won't owe taxes on the contributions or their investment returns until after you retire.
For 2019, there's a $6,000 limit on taxable contributions to retirement plans. Those aged 50 or over can contribute another $1,000.
In the eyes of the IRS, your contribution to a traditional IRA reduces your taxable income by that amount, and therefore it reduces what you owe in taxes. That effectively reduces the bite that the contribution takes out of your take-home income.
A contribution to a Roth IRA is not tax-deductible. You pay the full income taxes on the money you pay into the account. However, you will owe no taxes on the contributions or the investment returns when you retire and start withdrawing the money.
Deductions for IRA contributions are limited for those with higher incomes.
For singles, the maximum tax-deductible contribution starts shrinking once your modified adjusted gross income (MAGI) exceeds $64,000. Singles with adjusted incomes of $74,000 and above are not eligible for the tax deduction.
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.
- If the IRA contributor doesn't have a workplace plan but his or her spouse does, the 2019 limit starts at $193,000 and they are ineligible for a tax deduction when their income reaches $203,000.
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.
Who Can Deduct
To sum up, if your 2019 income is below the upper levels set for the year, and you don't have other retirement accounts, you can make the maximum contribution and it will be fully deductible.
If you don't qualify for the tax deduction, don't give up on saving for retirement. Here's why: You can contribute to a traditional IRA even if you can’t deduct any or all of it. In any case, the investment in an IRA will grow tax-free until retirement.
And remember, you can make a contribution up to that year's tax-filing deadline, which is usually April 15 of the following year.