How Do I Know If My IRA Contributions Are Tax Deductible?

How Do I Know If My IRA Contributions Are Tax Deductible?

Well, it depends….The answer to this question is not a simple yes or no because it’s contingent on a number of factors. Here’s a sample of what the “eligibility maze” looks like:

Do you have wages? The income must be derived from wages, not from passive income such as investment or rental income.

Do you participate in an employer retirement plan? You may not qualify, unless your income is below a certain threshold.

What’s your income?  If you exceed those levels, your contribution may not be deductible, but you can still contribute and your funds can grow on a tax advantaged basis.

Are you single or married? If single, the rules are easy to understand. If married, and one spouse is covered in an employer sponsored plan and the other isn’t, the rules get a little murky.

So, here’s the simplest rule: If you don’t participate in an employer-sponsored retirement plan, then there’s good news for you. Your contributions to a traditional IRA are tax deductible, although the maximum you can contribute to your traditional IRA this year is $5,500. However, if you’re 50 or over, you can make an additional "catch-up contribution" of $1,000, for a total of $6500.

So what about those who are participating in an employer-sponsored retirement plan? The good news is that your contributions to an IRA can still be fully or partially deductible; it all depends on your income. For 2015, those thresholds stand between $61,000 and $71,000 for single filers and $98,000 to $118,000 for married couples filing joint returns. If you’re married, but filing separately, the income limits are dramatically lower:  income north of $10,000 will not qualify for deductibility of your contribution, although can be exceptions to this rule. Married couples filing separately may determine their deduction eligibility using the “single” status only if they did not live together for the entire year.

Let’s say you don’t meet any of these criteria- now what?  Don’t despair, because you can still fund a traditional IRA and enjoy tax deferred earnings, The one caveat? You lose the up-front tax deductibility of your contribution. But, hey, if you're considering funding an IRA with after-tax money, why not fund a Roth IRA instead? Although contributions to a Roth IRA are made with after-tax dollars, distributions from the Roth are tax free vs. traditional IRA’s where distributions are taxable. Just like traditional IRAs, however, certain income thresholds come into play when contributing to a Roth IRA. For 2015, the income thresholds for single filers are between $116,000 and $131,000 and for married couples filing joint returns, between $183,000 and $193,000. But, don’t despair, there’s a work-around if your income exceeds these levels, but we’ll cover that in a follow up Blog!

For more information, please visit the IRS website.

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