Deducting IRA Contributions

The deadline for 2018 IRA contributions is April 15, 2019.  Workers and their spouses who were under age 70 at year-end 2018 can each contribute up to $5,500, or $6,500 for those 50 and older.  For traditional IRAs, income limits don’t apply.

That is, those named can make contributions of these amounts to a traditional IRA.  Whether those contributions will be tax-deductible is another matter.  In any case, investment earnings inside an IRA will be untaxed until money is withdrawn.

Deduction Limits Based on Plan Participation

Worker not covered by employer retirement plan.  If a worker was not covered by an employer’s retirement plan in 2018, IRA contributions are deductible.  Income is not an issue.

Example 1:  Nora Dixon, age 29, works for a small computer graphics company that does not offer a retirement plan to its employees.  Nora’s husband Oliver, also 29, is a physical therapist who is not covered by a retirement plan.  Nora and Oliver can both deduct their $5,500 contributions to a traditional IRA in 2018, regardless of the amount of their earned income.

Worker covered by employer retirement plan.  However, for workers who were covered by a retirement plan sponsored by their employer, income will determine deductibility of IRA contributions.  To deduct the maximum amount as a single filer, your modified adjusted gross income (MAGI) for 2018 must be $63,000 or less; you can take a partial deduction with MAGI up to $73,000.  Single filers who are covered by an employer plan and who have MAGI over $73,000 can’t deduct any IRA contribution.  (For plan-participating married people filing jointly, the 2018 MAGI ceilings are $101,000 for a full deduction and $121,000 for a partial deduction.)

Example 2: Paul and Rhona Benson, both age 44, are each covered by an employer-sponsored retirement plan, and they have MAGI of $111,000 in 2018.  That’s 50% of the way through the phase-out range for joint tax returns.  Thus, Paul and Rhona can each contribute up to $5,500 to traditional IRAs for 2018, and they can each take a $2,750 tax deduction (50% of the maximum).

One spouse covered by employer retirement plan.  Among married couples with higher incomes, one spouse might be able to deduct all or part of an IRA contribution.  That would be the case if one spouse is covered by an employer plan, but the other spouse is not.  The spouse not covered can deduct a full 2018 IRA contribution with joint MAGI up to $189,000, or a partial deduction with MAGI up to $199,000.

Example 3:  Sheila Ford, age 65, is covered by an employer plan at work, while her husband Greg, 68, is retired.  Their 2018 MAGI is $180,000.  Both Fords can make a $6,500 traditional IRA contribution for 2018.  However, because their joint MAGI is over $121,000, Sheila can’t take any tax deduction.  Greg, on the other hand, is not covered by an employer plan, so he can take a full $6,500 tax deduction because their joint MAGI is under $189,000.

Note that traditional IRA contributions are available only to workers and spouses under age 70.  In the previous example, Greg would not be able to make any IRA contribution if he were 72, for example.

The Roth Alternative

A taxpayer that can make a deductible traditional IRA contribution can instead make a contribution to a Roth IRA.  Roth IRA contributions are never tax-deductible.  However, after you have had a Roth IRA for five (5) years and reach age 59, all distributions are tax-free.  My office can review the tax aspects with you to help decide between a nondeductible Roth IRA and a potentially tax-deductible traditional IRA contribution.

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