IRA Deductions
Amounts you contribute to a traditional individual retirement account (IRA) may be eligible for a full or partial deduction from your taxable income for the year of contribution. If you qualify, this provides an immediate benefit because of the tax savings it provides. The tax break you get for contributing to a traditional IRA depends on a number of factors, including:
- your income level,
- filing status, and
- whether you (or your spouse) are covered by an employer's retirement plan.
If you're covered by your employer's retirement plan, your deduction for your IRA contribution is phased-out based on your adjusted gross income. The following table shows the range over which the deduction is phased out:
| Filing Status |
2013 |
2014 |
| Married filing jointly and qualifying widow(er) |
$95,000 to $115,000 |
$96,000 to $116,000 |
| Single or head of household |
$59,000 to $69,000 |
$60,000 to $70,000 |
| Married filing a separate return |
$0 to $10,000 |
$0 to $10,000 |
For 2013, if you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $178,000 but less than $188,000. The phase-out range for 2014 is $181,000 and $191,000.
Nondeductible contributions. Although your tax deduction for IRA contributions may be reduced or eliminated, you can still make a nondeductible contribution up to the annual limit. For 2013 and 2014, the maximum contribution is the lesser of $5,500 ($6,500 if you are age 50 or older) or your compensation for the year. You still get the benefit of having your money grow toward retirement on a tax-deferred basis.
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Planning Tools
To designate contributions as nondeductible, you must include in your annual tax return IRS Form 8606, which you can download. If you want to, you can also designate otherwise deductible contributions as nondeductible contributions. Failure to file Form 8606 will result in a penalty unless you can prove it was due to reasonable cause. More importantly, the IRS will automatically treat contributions as deductible unless it gets Form 8606, and then the burden is on you to unravel the mess that is created when the IRS discovers the contributions were not deductible.
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