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. However, there are rules and limits. 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.
- 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- The taxes on contributions to a Roth IRA are paid upfront, not when the money is withdrawn at retirement.
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 for 2019 and 2020, and you can deduct it from your taxes. You can add another $1,000 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 is the total you can deduct for all contributions to qualified retirement plans in 2019 and 2020. If you also have a 401(k), 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 and 2020, 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 it thus reduces the amount 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.
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 Filing Singly
For singles with a retirement plan at work, the maximum tax-deductible contribution starts shrinking once their modified adjusted gross income (MAGI) reaches $65,000 for 2020 ($64,000 for 2019). Singles with adjusted incomes of $75,000 for 2020 ($74,000 for 2019) and above are not eligible for the tax deduction.
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 $104,000 in adjusted gross income and disappears at $124,000 for 2020 (make that $103,000 and $123,000 for 2019).
- If the IRA contributor does not have a workplace plan their spouse does, the 2020 limit starts at $196,000, and no tax deduction is allowed once the contributor’s income reaches $206,000 ($193,000 and $203,000 for 2019).
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.
The Bottom Line
To sum up, 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 do not qualify for the tax deduction, please do not 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.
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, but it is worthwhile checking with a tax professional to ensure your retirement plan is optimal, and if the act contains provisions that might benefit your situation.