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 you have. Keep in mind that limits are adjusted every year for inflation.
- Contributions to a traditional IRA are deductible in the year they are made.
- Your ability to deduct an IRA contribution depends on how much you earn, whether you or your spouse already contribute to another plan(s), and the type of IRA you have.
- The taxes on contributions to a Roth IRA are paid upfront, not when the money is withdrawn at retirement.
- There are upper-income limits on deductibility, which depend on your tax filing status.
- Limits are adjusted every year for inflation.
Understanding Retirement Accounts and Tax Deductions
The IRA is one of a number of retirement savings plans that are qualified by the Internal Revenue Service (IRS), which means 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 for 2022 and $6,500 for 2023, and you can deduct it from your taxes. You can add another $1,000 for both 2022 and 2023 to that if you are 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 in 2022 is the total you can deduct for all contributions to qualified retirement plans. For 2023, this is $6,500 or $7,500. Having a 401(k) account at work doesn't affect your eligibility to make IRA contributions, and you can deduct up to the maximum annual contribution of $20,500 in 2022 and $22,500 in 2023.
If you need to prioritize, it often makes sense to contribute enough to your 401(k) account to get the maximum matching contribution from your employer. But after that, adding an IRA to your retirement mix can provide you with more investment options and possibly lower fees than your 401(k) charges.
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.
In the eyes of the IRS, your contribution to a traditional IRA reduces your taxable income by that amount and, thus, reduces the amount you owe in taxes.
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.
In December 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which is designed to improve retirement security for Americans. Under the act, the tax deduction amounts and basic rules are unchanged.
With no retirement plan at work, you may deduct your contribution regardless of your income. But for those with higher incomes, deductions for IRA contributions are limited if they (or their spouse, if married) have a retirement plan at work. Those limits depend on your filing status.
If You Are a Single Filer
For singles with a retirement plan at work, the maximum tax-deductible contribution starts shrinking once their modified adjusted gross income (MAGI) reaches $68,000 for 2022 and $73,000 in 2023. The tax deduction phases out if your adjusted income goes above $78,000 in 2022 and $83,000 in 2023.
If You Are Married Filing Jointly
This is where things get complicated. For those married and filing jointly, the maximum tax-deductible contribution differs significantly if one person is contributing to a 401(k), and it 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 $109,000 in adjusted gross income and disappears at $129,000 for 2022 ($116,000 and $136,000 for 2023).
- If the IRA contributor does not have a workplace plan and their spouse does, the 2022 limit starts at $204,000, and no tax deduction is allowed once the contributor’s income reaches $214,000 ($218,000 and $228,000 for 2023).
If You Are Married Filing Separately
For taxpayers who are married and filing separately, 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 do not get any deduction.
Frequently Asked Questions
What Is an IRA Deduction?
An IRA deduction is an above-the-line tax deduction, which allows the deduction to be taken regardless of if you file your returns with itemized deductions or the standard deduction. The deduction reduces your taxable income and, therefore, the amount of taxes you pay. These deductions apply to the contribution amounts for traditional IRAs.
Can You Take an IRA Deduction?
Individuals that contribute to IRAs can take deductions if they qualify. Qualifying for an IRA deduction is based on your income, which needs to be below certain thresholds based on your filing status.
Can I Have a 401(k) and an IRA?
Yes, you are allowed to have both a 401(k) and an IRA, and many people choose to have both types of retirement accounts. Each comes with its own rules, such as contribution amounts and income threshold limits.
The Bottom Line
If your 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 cannot deduct any or all of it, and that investment will grow tax-free until retirement. Remember, you can make a contribution up to that year’s tax-filing deadline, which is usually April 15 of the following year.