Understanding IRA Deductibility: How Much of My Contribution is Tax Deductible?
Considering an Individual Retirement Account (IRA) for retirement savings? One of the key aspects to understand is the tax deductibility of your contributions. Whether your contribution is tax deductible depends on several factors, including your age, income, and participation in other retirement plans. This article aims to provide you with a comprehensive understanding of IRA deductibility.
IRA Contribution Limits and Deductibility by Age
If you are under the age of 65 by the end of this year, the maximum IRA contribution amount that can be tax-deductible is $6,000. However, this amount cannot exceed your gross salary or net business income if you are self-employed. For those who will turn 65 by the end of 2020, the maximum deductible amount increases to $7,000.
Partial and Full Deductibility for Active Participants in Employer Retirement Plans
For individuals who are active participants in a retirement plan sponsored by their employer, such as a 401(k) plan, the amount of IRA contribution that can be deducted begins to phase out. The deduction starts to phase out if the Adjusted Gross Income (AGI) before deducting any IRA contribution is at least $65,000 for single filers and $104,000 for joint filers. At an AGI of $75,000 or more for single filers and $124,000 or more for joint filers, no deduction is allowed.
Special Cases for High-Income Earners
For individuals whose income is too high to qualify for an IRA deduction, there are still opportunities for tax savings. You may be able to make a nondeductible contribution to either a traditional or Roth IRA, but there are special rules that must be followed. This can provide a way to save on taxes while still contributing to your IRA.
ROTH IRA Contributions and Deductibility
Unlike traditional IRA contributions, ROTH IRA contributions are never tax deductible. However, the distributions from a ROTH IRA are tax-free, making it a popular choice for many individuals. The advantages of ROTH IRA contributions include the possibility of tax-free growth and tax-free withdrawals during retirement, provided certain conditions are met.
Considerations for Joint IRA Contributions
If you have a non-working spouse, a contribution can still be made to their IRA if the joint income is below the threshold. Contributions to an IRA are allowed up to the amount of your earned income or the maximum annual contribution limit, which is $6,000 if you are under 50 years old and $7,000 if you are 50 or older per person.
Understanding the Impact of Your Income and Retirement Plan Participation
Your eligibility for a fully or partially tax-deductible IRA contribution is determined by your total income, your filing status, and whether you or your partner is covered by a retirement plan at work. For specific limits, refer to the IRA Deduction Limits section of our website. This can help you make informed decisions about your retirement savings and tax implications.
Understanding the complexities of IRA deductions can be overwhelming, but with the right information and guidance, you can make the most of your retirement savings. Ensure that you consult financial experts or refer to the IRS guidelines for detailed information on IRA deductions.