One of the attractive features of a traditional individual retirement account is your ability to deduct your annual contributions from your taxable income: It's a tax deduction. In return, you must add withdrawals from your traditional IRA to your taxable income. If you or your spouse is covered by a qualified retirement plan at work, part or all of your IRA contribution might be nondeductible.
The Role of Income
Your modified adjusted gross income, or MAGI, plays a role in determining the size of your IRA contribution and possibly your deduction. Internal Revenue Service rules allow you to contribute up to a set amount of your MAGI into a traditional IRA. For 2015, for example, you can contribute up to $5,500 of income annually -- or $6,500 if you've reached age 50. A person can also base a contribution on the income of a spouse. The amount available for a spousal contribution is the couple's income minus any IRA nonspousal contributions, up to the annual IRS limit. These limits don't apply to rollovers from other qualified retirement accounts.
If You're Covered at Work
Having a qualified workplace retirement plan, including a 401(k) or 403(b), may limit the amount of your IRA contribution that is deductible. As of the time of publication, if your income tax filing status is single or head of household, you can take a full IRA deduction if your income is $60,000 or less. You can take a partial deduction for income up to $70,000 but no deduction if your MAGI exceeds this amount. The full deduction limit for married couples filing jointly is a MAGI of $96,000. Partial deductions are allowed up to $116,000, but a MAGI above this limit makes the entire contribution nondeductible.
If only your spouse is covered by a qualified workplace plan and you file a joint return, you can take a full IRA deduction if your joint MAGI is no greater than $181,000. Partial deductions are available up to $191,000 but prohibited beyond this limit. If you are married and filing separately, you can take a partial deduction if your MAGI is less than $10,000; otherwise, the contribution is nondeductible.
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The Role of Roth IRAs
A Roth IRA does not provide a tax deduction, but if you follow the rules, you can withdraw your money tax free. Your annual maximum IRA contribution applies to the sum of your traditional and Roth IRA contributions. This is also true when figuring the maximum spousal contribution. The maximum you can contribute to your Roth IRA is subject to a MAGI limit, which can change from year to year.
Report any nondeductible contributions to your traditional IRA on Internal Revenue Service Form 8606. The total amount of your nondeductible contributions forms the cost basis of your IRA. When you withdraw money from your traditional IRA, you exclude from your taxable income the portion that represents the cost basis. For example, if 10 percent of your traditional IRA contributions were nondeductible, then 10 percent of any withdrawal is not taxed.