The Internal Revenue Service does not stop you from contributing to a traditional IRA if you make too much money, but does limit your ability to deduct your contributions when you're covered by a retirement plan at work, such as a 401(k) plan. The income limits kick in if you're eligible to participate -- even if you don't actually contribute to the 401(k) plan.
Income Limits for IRA Deduction
The income limit for deducting your traditional IRA contribution when covered by a 401(k) depends on your filing status. For example, in 2015, you can't deduct any of your contribution if your modified adjusted gross income exceeds $71,000 if you're single or $118,000 if you're married filing jointly. If you're single and your income falls between $61,000 and $71,000, or married filing jointly and your income falls between $98,000 and $118,000, the maximum deduction is reduced.
Calculating a Reduced Deduction
If you fall in the reduced deduction range, you calculate your maximum deduction based on how close you are to the high end. First, subtract your income from the cutoff for claiming any deduction. Then, divide the result by $10,000 if you're single or $20,000 if you're married filing jointly. Finally, multiply the result by the maximum deduction if you're not covered. For example, say in 2015 your income is $70,000 and you're single. Subtract $70,000 from $71,000 to get $1,000. Divide $1,000 by $10,000 to get 0.1. Finally, multiply 0.1 by $5,500 -- the 2015 contribution limit, find you can only deduct $550 of traditional IRA contributions for the year.
Roth IRA Alternative
If you can't deduct your traditional IRA contribution because your income is too high, you might still be eligible to contribute to a Roth IRA because the limits are higher. As of 2015, you can make a full Roth IRA contribution if your income doesn't exceed $116,000 if you're single or $183,000 if you're married filing jointly. With a Roth IRA, your contributions aren't deductible, but you can withdraw your contributions tax-free and penalty-free at any time. As long as you're at least 59 1/2 years old and have the Roth IRA open for five years, you also get the earnings out tax-free.
Making Nondeductible Contributions
Even if you're covered by a 401(k) plan and make too much money, you can still make a nondeductible contribution to an IRA. Though you miss out on the benefit of a tax deduction for contributing, the money still grows tax-free in the account. When you take distributions, a portion of the withdrawal comes out tax-free based on the portion of the account value comprised of nondeductible contributions. For example, if you've put in $10,000 of nondeductible contributions and the account is worth $100,000 when you take a distribution, 10 percent of the withdrawal is tax-free.
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