When Can You Deduct Traditional IRA Contributions?
When Can You Deduct Traditional IRA Contributions?
Today’s blog is going to be a little more in-depth than what I’ve done before. I’m first going to talk about who can contribute to a Traditional IRA and Roth IRA, the contribution limits, and when those contributions are tax-deductible. This is a timely topic because the deadline for making 2020 contributions to a Traditional and/or Roth IRA is April 15, 2021.
Difference between Traditional IRA and Roth IRA
IRAs fall into two buckets, Traditional and Roth, the difference between the two is what kind of dollars were used to make the contributions. If you contributed to a Traditional IRA, IRA for short, then that means that the contributions were made with pre-tax money, and that’s where taking a tax deduction comes in. Roth IRAs are made with after-tax money.
Who can contribute?
Anyone who has earned income can contribute to an IRA or Roth. Earned Income is a key term. There’s a list of income that’s considered earned income, like wages, and unearned income, like pension and social security. Those are just a few examples. Roth IRAs have another layer to determine who can contribute and how much, and that’s based on the person’s modified adjusted gross income (MAGI) limits.
How much can you contribute?
Now let’s talk about how much you can contribute. The numbers listed here are for the calendar year 2020 and that’s important because it could increase. For 2020, you can contribute $6000, and if your age 50 ½ you could increase it by $1,000 for a total of $7,000. Two important things to know: First, it’s not $6,000 for an IRA and $6,000 for a Roth. It’s $6,000 total, which you can split any way you want between the IRA and Roth. And second, the contribution amount cannot exceed your earned income. For example, if you’re earned income is $5000 then that’s the max you can contribute.
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Are contributions deductible?
Let’s go on to answering the question “are contributions deductible?” This is going to sound like a lot of numbers, so I’ve included a link below to download the chart and see it in an easy-to-read format.
Tax filing status Single
If your tax filing status is single, and your modified adjusted gross income (MAGI) is more than $75,000 then the contribution is not deductible, if your MAGI is between $65,000 and $75,000 then a portion of it is deductible, and if your MAGI is less than $65,000 then your full contribution is deductible.
Tax filing status Single Married Filing Jointly
If you’re filing status is married filing jointly the amount you can deduct depends not only on your modified adjusted gross income (MAGI) but also on if you and/or your spouse are active participants in an employer-sponsored plan.
There are three questions to ask, and each answer has its own MAGI limit that determines how much of the contribution is deductible. The first question is are you an active participant in your employer-sponsored retirement plan? If you are and your MAGI is more than $124,000 then no deduction is allowed, if your MAGI is between $104,000 and $124,000 then it’s partially deductible, and if your MAGI is less than $104,000 then it’s fully deductible.
But let’s say you’re not an active participant in an employer-sponsored plan but your spouse is, the dollar amount changes but still follows the same logic. If your MAGI is more than $206,000 then no deduction is allowed, if your MAGI is between $196,000 and $206,000 then it’s partially deductible, and if your MAGI is less than $196,000 then it’s fully deductible.
If neither you nor your spouse are active participants in an employer retirement sponsored plan then your full contribution is deductible.
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About the Author
Randa Hoffman is the owner and financial planner at Radiant Wealth Planning, a fee-only financial planning and investment management firm exclusively for women. She helps ease the uncertainty around retirement, tax planning, and transitioning wealth so that women can live a life they’ve always dreamt of. She holds an MBA and EA and lives in Newport Beach, CA.
