Deductions Allowed for Contributions to a Traditional IRA
Traditional IRAs were first instituted in 1974 as part of the Employee Retirement Income Security Act as an attempt to persuade individuals to save for retirement by offering tax incentives. Contributions to IRAs grow tax-free and, in many cases, can be tax-deductible. However, once a contribution is made, it must be left in the account until the individual reaches the age of 59 1/2. If it is withdrawn early, it will be subject to a 10 percent penalty.
Other People Are Reading
-
Contribution Limits for a Traditional IRA
-
Anyone can contribute to a traditional IRA regardless of access to a retirement plan at work as long as he receives taxable income during the year and is under 70 1/2 years old. For 2009 the contribution limit for is $5,000 per person. If you are above 50 years old you are allowed to contribution $6,000. In order to contribute to a traditional IRA, your taxable income must at least equal your contribution.
Deductions for People Without a Retirement Plan Through Work
-
If you do not have access to a retirement plan through work, you may deduct your entire contribution to a traditional IRA up to the contribution limits. For example, if you were 62 years old, made $60,000, and contributed $6,000 to your traditional IRA, your deduction would be $6,000.
-
Deductions for People With Work-Sponsored Retirement Plans
-
If your employer offers you the opportunity to participate in a retirement plan at work, the maximum deduction that you can take for your contributions to a traditional IRA may decline depending on your income level and tax-filing status. As long your modified adjusted gross income is below $55,000 for singles and heads of household, $89,000 for married couples filing jointly, or $0 for married couples filing separately, you may take the full amount of your deduction. If your modified adjusted gross income falls between $55,000 and $65,000 for singles and heads of household, $89,000 and $109,000 for married people who file one return or $0 and $10,000 for those who are married and file separately, you make take a partial deduction because your modified adjusted gross income falls within the phaseout range. If your income exceeds these limits, you may still put money into a traditional IRA but you cannot take a tax deduction for your contributions.
Deductions for Individuals Whose Spouses Have Work-Sponsored Retirement Plans
-
If you are married and your spouse has access to a work-sponsored retirement plan, you may be restricted as to how much of your contribution to a traditional IRA can be deducted. If your modified adjusted gross income is less than $166,000 you can take the full deduction. If it falls between $166,000 and $176,000 you can take a partial deduction because your income falls in the phaseout range. If it is greater than $176,000, you can still make contributions to your traditional IRA but they will not be tax-deductible.
Calculating Phaseout Range Deductions
-
If your modified adjusted gross income falls within the phaseout range, you can use the formula below to calculate how much of your contribution is deductible. In the formula, D is your maximum deduction, CL is your contribution limit, MAGI is your modified adjusted gross income, U is the upper limit of the phaseout range and L is the lower limit of the phaseout range.
D = CL * (U - MAGI) / (U - L)
For example, if you were 53, your spouse, but not you, were able to participate in an employer-sponsored employment plan, and your modified adjusted gross income were $170,000, your deduction limit would be $3,600.
-
