Do IRA contributions reduce average gross income (AGI)?

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July 2018

Contributions to a traditional IRA reduce adjusted gross income (AGI) because the qualifying contribution is tax deductible. On the other hand, AGI is not reduced with Roth IRA contributions because they are funded with after-tax dollars. Any investment gain is also tax free with a Roth IRA. When the money is withdrawn at retirement, the amount is not taxed. This differs from a traditional IRA, where taxes are owed at the time of withdrawal.

The IRS places limits on the amount you can invest annually in an IRA. As of 2018, the contribution limit is $5,500 plus a $1,000 catch-up contribution for taxpayers who are 50 years old and over.

Withdrawals

Holders of IRAs are not permitted to withdraw funds for retirement until they turn 59.5. When the account holder is 70.5 they must take required minimum distributions from a traditional IRA. This rule does not apply to Roth IRAs. Funds withdrawn from traditional and Roth IRAs before age 59.5 are subject to a penalty of 10% and taxation, although there are a few exceptions.

Income Limitations

If you are not covered by an employer-sponsored retirement plan, the full contribution to a traditional IRA is deductible. If you participate in an employer-sponsored retirement plan, such as a 401(k), there are deduction limits based on your modified adjusted gross income (MAGI). These are the limits for single taxpayers in 2018:

  • Those making less than the $63,000 MAGI limit get the full deduction.
  • Those making more than $63,000 but less than $73,000 MAGI, get a partial deduction.
  • Those making more than $73,000 MAGI do not get a deduction.
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