Individual retirement arrangements allow you to save money for retirement without having to go through an employer plan, which gives you more flexibility in your investment options. Whether you can claim a tax deduction for money that you contribute to your IRA depends on which type of IRA you're investing in and whether you participate in an employer-sponsored retirement plan, such as a 401(k) plan.
No Employer Plan
If you're single and don't have an employer retirement plan, you can deduct all of your traditional IRA contributions up to the annual contribution limit. If you're married, even if you file a separate return from your spouse, neither you nor your spouse can be covered by an employer plan in order for you to automatically qualify to deduct your entire traditional IRA contribution limit. If you're not sure if you're covered look on the Form W-2 your employer sends you at the end of the year. If the "retirement plan" box in Box 13 is checked, you're a participant.
Employer Plan Participation
If either you or your spouse -- if married -- participate in an employer plan, you can only deduct your contribution if your modified adjusted gross income falls below the annual limits set by the IRS in Publication 590. The limits depend on your filing status and whether you or your spouse is covered. These limits also have a phaseout range, which is an income range over which your deduction limit decreases as your income increases, rather than the deduction being an all-or-nothing proposition.
Calculating Deduction Limits
If you fall in the phaseout range, you have to calculate your maximum traditional IRA deduction. To figure your deduction, subtract your modified adjusted gross income from the upper end of the phaseout range. Next, subtract the lower end of the phaseout range from the upper end of the phaseout range. Then, divide the difference between the upper end and your MAGI by the difference between the upper end and the lower end. Finally, multiply that result by your maximum annual contribution. For example, assume you are single, your MAGI is $64,000, your maximum contribution is $6,000, the upper end of the phaseout range is $70,000 and the lower end is $60,000. First, subtract $64,000 from $70,000 to get $6,000. Next, subtract $60,000 from $70,000 to get $10,000. Then, divide $6,000 by $10,000 to get 0.6. Finally multiple 0.6 by $6,000 to find you can deduct the first $3,600 of your traditional IRA contribution.
Roth IRA Contributions
You can't deduct any of your Roth IRA contributions from your taxes because Roth IRAs offer after-tax savings. Though you don't get the benefit of a deduction, your contributions and earnings come out tax-free when you withdraw qualified distributions. If you can't deduct some or all of your traditional IRA contribution, consider putting that money in a Roth IRA rather than making a nondeductible contribution to a traditional IRA, assuming your income is not too high.
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