The IRS gives eligible individuals tax benefits for contributions made to an IRA. One possible benefit is a tax deduction for your traditional IRA contributions.
To determine whether you are eligible for a deduction to a traditional IRA, you first need to confirm whether you receive contributions or benefits under a retirement plan provided by your employer.
IRA deductibility when you are not covered under an employer retirement plan
If you (or your spouse) do not receive contributions or benefits under an employer retirement plan, then you can claim a tax deduction for 100% of the allowable contributions that you make to a traditional IRA.
For the purpose of this deduction, the IRS defines an employer retirement plan to include:
SEP IRA
SIMPLE IRA
401(k)
403(b)
Profit sharing
Pension plan
However, the rules are not the same for all of these plans. For example, SEP IRA contributions affect your eligibility to deduct your IRA contributions for the year they are actually credited to your SEP IRA, while pension plans affect the deductibility of your IRA contribution for the year for which the contributions were intended. If you aren’t sure whether you are covered under an employer retirement plan, your employer should indicate on your Form W-2, Wage and Tax Statement, whether you are covered for any given year.
IRA deductibility when you are covered by an employer retirement plan
If you (and/or your spouse if you are married) receive contributions or benefits under an employer plan for the year, your eligibility for deducting your IRA contribution depends on your tax filing status and your modified adjusted gross income (MAGI). Learn more about income limitations and how to calculate your deductibility here.
Other options for saving
If you are not eligible to deduct your IRA contribution, you can consider making a contribution to your Roth IRA. Unlike your traditional IRA where earnings grow tax-deferred and are taxable when distributed, earnings in your Roth IRA grow tax-deferred but are tax-free if your distributions meet certain requirements. Learn more about contribution limits for a Roth IRA.
If you are eligible to deduct only a portion of your IRA contribution, you can also choose to contribute the deductible amount to your traditional IRA and the nondeductible amount to your Roth IRA.
The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.