How to Calculate the Deductible Contribution for a Traditional IRA
A significant advantage of contributing to a traditional individual retirement account, or IRA, is deducting your contribution from your taxable income. For example, a person in the 33 percent tax bracket who contributes $5,000 would save $1,650 on his taxes. However, if you or your spouse is covered by a workplace retirement plan, including a 401k, you might not be able to deduct the money you put into your traditional IRA. If you fall in the phaseout range for your filing status, you have to calculate how much you can contribute based on your modified adjusted gross income (MAGI) and your filing status.
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Instructions
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Compare your modified adjusted gross income to the limits for your filing status. The limits are published each year in IRS Publication 590. If your MAGI falls above the phaseout range, you cannot contribute. If it falls below, your entire contribution is deductible. If it falls in the phaseout range, you have to calculate the reduced contribution amount.
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Subtract your MAGI from the maximum MAGI limit. For example, if you are single and have a MAGI of $57,000, you would subtract $57,000 from $66,000 to get $9,000.
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Subtract the highest value of the phaseout range from the lowest value of the phaseout range. For singles in 2010, you would subtract $56,000 from $66,000 to get $10,000.
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Divide the step 2 result by the step 3 result to find the portion of the maximum annual contribution that can be deducted. In this example, you would divide $9,000 by $10,000 to get 0.9.
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Multiply the step 4 result by the maximum annual contribution to find the maximum amount you can deduct for your traditional IRA. Concluding the example, if you are under 50 in 2010, your maximum contribution would be $5,000, so you would multiply $5,000 by 0.9 to find the most you could deduct would be $4,500.
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Tips & Warnings
If neither you nor your spouse has a retirement plan through employment, you can deduct your contribution regardless of your income.
