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Understanding IRA Deduction Rules

Key facts

  • One potential reason to open an IRA account is the tax benefits you receive.
  • Tax deductions are only eligible for Traditional IRA contributions and not Roth IRA contributions.
  • Your income and whether you are covered by an employer-sponsored plan determine how much of your IRA contributions are tax deductible.

One of the main incentives for opening an Individual Retirement Account (IRA) is the tax benefits. However, there are a number of factors that determine whether you can deduct contributions when you file your income tax returns, and if so, how much. Understanding IRA deduction rules is key to making the right investment decisions for your circumstances.

Eligibility for Deductions

Whether your IRA contributions are tax deductible depends on the type of IRA you plan to open. Contributions to Roth IRAs can never be deducted on income tax returns, because the account allows withdrawals on distributions and earnings to be made tax-free. Taxes must be paid on all contributions to your Roth IRA in the year the income is earned.

The second consideration is whether you were covered by an employer-sponsored plan for part or all of the year. If you were covered by a retirement plan, your employer checks the “retirement plan” box on your W2. This may reduce or eliminate the amount of your IRA contribution that can be deducted.

The third consideration is your level of income for the year. The IRS reviews income limits annually to determine at what point you can deduct all, a partial, or none of your IRA contribution. Note that the income limits are based on your modified adjusted gross income (MAGI), rather than the more common adjusted gross income (AGI).

The 2016 limits remain unchanged from the previous year, with separate income limits for single and joint filers. These are further broken down by whether or not you are covered by an employer-sponsored plan.

Income Limits for IRA Tax Deductions

If you are covered by an employer-sponsored retirement plan, income-based deduction limits are as follows:

If your filing status is… And your Modified AGI is … Then you can take…
Single or head of household < $61,000 a full deduction up to your contribution limit.
>$61,000 but < $71,000 a partial deduction.
> $71,000 no deduction.
Married filing separately < $10,000 a partial deduction.
> $10,000 no deduction.
Married filing jointly or qualifying window(er) < $98,000 a full deduction up to your contribution limit.
> $98,000 but < $118,000 partial deduction.
> $118,000 no deduction.
Source: IRS

If you are not covered by an employer-sponsored retirement plan, income-based deduction limits are as follows:

If your filing status is… And your Modified AGI is … Then you can take…
Single, head of household, or qualifying widow(er) any amount a full deduction up to the amount of your contribution limit.
Married filing jointly or separately with a spouse who is not covered by a plan at work any amount a full deduction up to the amount of your contribution limit.
Married filing jointly with a spouse who is covered by a plan at work < $184,000 a full deduction up to the amount of your contribution limit.
>$184,000 but < $194,000 a partial deduction.
> $194,000 no deduction.
Married filing separately with a spouse who is covered by a plan at work < $10,000 a partial deduction.
> $10,000 no deduction.
Source: IRS

Taking Your Tax Deduction

If you wish to take a deduction for your IRA contribution, you cannot use the 1040 EZ form. File your taxes with the 1040 or 1040A form. You will use Form 8880 to determine whether your contribution is tax-deductible and if so, how much.


Disclosure

Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.

This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.

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