Traditional IRA Phaseout
When creating a retirement plan, many people consider investing money in an IRA. One of the key benefits of a traditional IRA is that it allows tax deductible contributions. However, your modified adjusted gross income (AGI) must be less than a specified amount to receive the deduction. Knowing and understanding those limits will help you comply with IRS guidelines and avoid hassles.
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Availability of an Employer-Sponsored Plan
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If you do not have access to an employer-sponsored retirement plan, then your entire contribution to a traditional IRA is tax deductible. For example, if you contribute $5,000 to your traditional IRA in 2010, then you can deduct $5,000 on your taxes that year.
If you do have access to an employer sponsored retirement plan, then your modified AGI must be below a set amount to receive a tax deduction.
What is a phase out?
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You can deduct the full amount of your traditional IRA contribution from your taxes if your modified AGI is equal to or less than a specified amount. If your income is greater than that amount, then you may receive a reduced deduction if your modified AGI is within the phaseout range. If your modified AGI exceeds the phaseout range, then you cannot deduct your contribution.
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2010 Phaseout Ranges
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For 2010, the phaseout range for a single individual or a head of household is $56,000 to $66,000. The phaseout range for a married couple filing jointly or a qualified widow or widower is $89,000 to $109,000. For a married individual filing a separate return, earnings less than $10,000 are in the phaseout range.
Beyond 2010
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The IRS adjusts the phaseout ranges each year. The current ranges are published on the IRS website and in "Publication 590, Individual Retirement Arrangements (IRAs.)"
How to Reduce Modified AGI
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There are some ways to reduce your modified AGI if your earnings fall into or above the phaseout range. One strategy is to increase contributions to a 401k, 403b or SEP. You can also sell investments at a loss to offset capital gains. If your losses exceed your capital gains, then you can use your losses to offset up to $3,000 in ordinary income in the same year. Finally, you can contribute money to a health savings account if you are eligible.
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References
- Photo Credit A young woman holding a pen, doing her taxes image by Christopher Meder from Fotolia.com
