Deductible Traditional IRA Income Limit

Traditional individual retirement accounts offer retirement savings benefits for individuals. If you (and your spouse, if applicable) are not covered by a retirement plan at through your job, you can deduct your contribution regardless of your income. However, if you are covered, you may not be able to claim a deduction.

Limits

The modified adjusted gross income limits depend on your filing status and whether you or your spouse has access to the retirement plan through a job. In addition, these limits change on an annual basis. If your MAGI exceeds the phaseout range, you cannot deduct your contribution. As of 2010, if you are single and covered, your contribution is reduced if your MAGI falls between $56,000 and $66,000. If you are married filing separately, your contribution is reduced if your income falls between $0 and $10,000 regardless of which spouse is covered. If you are covered and married filing jointly, your contribution is reduced if your MAGI falls between $89,000 and $109,000. If only your spouse is covered and you are married filing jointly, your contribution is reduced if your MAGI falls between $167,000 and $177,000.

Calculations

You need to know your annual contribution limit, your MAGI and the upper and lower limits of your phaseout range in order to figure your maximum traditional IRA deduction for the year. The annual contribution limit is set by the IRS and varies depending on your age. As of 2010, the annual contribution limit equals $5,000 for people under 50 and $6,000 for people 50 and older. To find your maximum deduction, subtract your MAGI from the upper limit and divide the result by the size of the phaseout range. Then multiply the result by your maximum contribution. For example, if you are single and 30 years old with a MAGI of $58,500, you would subtract $58,500 from $66,000 to get $7,500, divide $7,500 by $10,000 (the difference between $56,000 and $66,000) to get 0.75 and multiply 0.75 by $5,000 to get $3,750 as your maximum deduction.

Misconceptions

Just because you cannot deduct your contribution does not mean you cannot make a nondeductible contribution to your traditional IRA. These contributions grow tax-free in the account and when you take a distribution, the part that comes from the nondeductible contributions comes out tax-free. In addition, if you roll the money into a Roth IRA, the nondeductible contributions will not be counted as taxable income.

Reporting

You must file form 8606 with your income taxes if you make nondeductible contributions to your traditional IRA. This form documents how much of your traditional IRA contribution is deductible and how much you are able to write off. If you do not file this form when you make nondeductible contributions, the IRS will treat the money as being from deductible contributions when you take a withdrawal.

History

When traditional IRAs first came into existence in 1974, people covered by an employer-sponsored plan could not contribute. Congress relaxed this rule under the 1981 Economic Recovery Tax Act, but five years later imposed income limits on who could claim a deduction if covered by employer-sponsored plans. Since that time, the maximum MAGI limits have been adjusted periodically for inflation.

References

• Internal Revenue Service: Publication 590
• Congressional Budget Office: Legislative History of IRAs
• Internal Revenue Service: Effect of Modified AGI on Deductible Contributions If You ARE Covered by a Retirement Plan at Work
• Internal Revenue Service: Effect of Modified AGI on Deductible Contributions if You are NOT Covered by a Retirement Plan at Work
• Ascensus: IRA Eligibility Calculator