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When Individual Retirement Accounts, or IRAs, were first introduced with the Employee Retirement Income Security Act (ERISA) of 1974, a big selling point was that contributions to an IRA account were tax deductible. Hunting for ways to reduce one’s tax burden has been an American pastime since the Boston Tea Party, and the inauguration of IRAs was intended as an incentive for Americans to save more for their own retirement. The new savings vehicles were immediately popular.

But are IRA contributions always deductible? First, there are two varieties of IRA: regular IRAs and Roth IRAs. Contributions to IRAs are never tax deductible; Roth accounts provide tax benefits in other ways. So the following discussion considers “regular IRAs” only — the original type of IRA first introduced in 1974.

If neither you nor your spouse is covered by a retirement plan at your place of employment — in most cases, a 401(k) — then your regular IRA contributions are entirely deductible. However, if either of you does have such a plan, then your contributions may be only partially deductible, or not deductible at all. Because 401(k)s and similar employer savings plans also allow you to make before-tax contributions, the Internal Revenue Service has seen the need to cap the cumulative tax benefits of the various tax-advantaged savings plans now available to American taxpayers.

Nondeductible IRA contributions

Nondeductible IRA contributions


The determining issue is your modified adjusted gross income, or MAGI, as reported on your tax return for the year in question. The deductibility of your regular IRA contributions “phases out” over a MAGI range, as determined (and adjusted annually) by the IRS. For example, for married couples filing jointly (in 2012), the phase-out range is $92,000 to $112,000. This means that if the couple’s tax return shows a MAGI of $92,000 or less, then contributions by both spouses to regular IRAs are fully deductible, even if either or both have qualified retirement plans at work. If the MAGI is between $92,000 and $112,000, then contributions (by a spouse with a qualified retirement plan at work) are partially deductible on a sliding scale. And if the MAGI is above $112,000, then contributions (by that same spouse) are not deductible.

For single filers and individuals filing as head of household, the phase-out range is lower, $58,000 to $68,000. Married people filing separately get no break from the IRS: the phase-out range is $0 to $10,000.

And the situation of nonworking individuals (or individuals who work but don’t have a retirement plan) filing a joint return with their spouse is more complex. As shown above, the working spouse (with a retirement plan) loses the ability to deduct his (or her) regular IRA contribution over a phase-out range of $92,000 to $112,000. A nonworking spouse — or a spouse without a retirement plan — can still deduct contributions to his or her regular IRA, provided the MAGI for that year is $173,000 or less. If the MAGI is between $173,000 and $183,000, the nonworking spouse’s contribution is only partially deductible, and if the MAGI exceeds $183,000, then the nonworking spouse cannot deduct his or her contribution.

For example, let’s say that Josh and Barbara file a joint return in 2012, showing a modified adjusted gross income of $170,000; Barbara works as a lawyer and participates in a qualified retirement plan at her law office, while Josh works part-time at the local library and has no retirement plan. Because their MAGI is more than $112,000, Barbara cannot deduct her contribution to a regular IRA for that year. However, because the MAGI is less than $173,000, Josh can deduct the full amount of his contribution to his own traditional IRA.

Note that the figures above all apply to the year 2012; check with the IRS for adjusted figures in subsequent years. And there are various additional rules that determine whether one “participates” in a qualified retirement plan at one’s place of employment or not. If you’re unsure, check with the person at work who manages your retirement plan.

Even if your situation is such that you’ll be making nondeductible IRA contributions, it’s usually best to make the contributions anyway — your retirement money will grow tax free, and you’ll reinforce the good habit of saving.

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