What Contributions to an IRA Count for Federal Tax Deductions?

A person may choose to save for his retirement by opening a traditional IRA, Roth IRA or both. While the Internal Revenue Service recognizes both types of individual retirement accounts, the IRS treats a taxpayer’s contributions to each differently. Whether the IRS allows a person to deduct his contribution to an IRA depends on the type of retirement account he owns, the modified adjusted gross income (MAGI) reported on his federal tax return and his tax filing status.

Contribution Limits

As of publication, the IRS allows a taxpayer under age 50 who reports earned income on his federal tax return to contribute up to 100 percent of his compensation or $5,000, whichever is less, to an IRA. If a person is 50 or older, the IRS permits him to contribute up to $6,000 in a year.

Traditional IRA vs. Roth IRA

Because a person contributes post-tax dollars to a Roth IRA, the IRS does not allow a taxpayer to deduct deposits into a Roth IRA on his federal tax return. If a person establishes a Roth IRA at least five years before taking his first withdrawal from the account and is 59 1/2 or older at the time his receives his initial disbursement from his Roth IRA, the IRS generally will not assess taxes on the money he withdraws even if his disbursement includes interest earned by the account.

Since a person contributes pre-tax dollars to a traditional IRA, the IRS allows an individual to deduct the amount he contributes to a traditional IRA on his federal tax return if his MAGI is below certain limits. The IRS views withdrawals from a traditional IRA as taxable income and will assess an additional 10 percent tax to disbursements an individual receives before he is 59 ½.

Modified Adjusted Gross Income

The IRS reduces or eliminates a person’s ability to deduct his contributions to a traditional IRA if the MAGI he reports on his federal tax return is above certain amounts. The IRS identifies different MAGI thresholds for each way a person can file his federal taxes. The IRS lowers its MAGI thresholds if a taxpayer, or his spouse if married, participates in a retirement plan offered by an employer. If, for instance, a married taxpayer files a joint tax return with his wife and neither of them participates in an employer-sponsored retirement plan, the IRS allows him to deduct the full amount of his contribution to a traditional IRA regardless of his MAGI. If the taxpayer does participate in his employer’s plan, he can deduct his total IRA contribution only if his MAGI is $89,000 or less.

Spousal IRA

If a married taxpayer who files a joint tax return contributes to a traditional spousal IRA for his non-working wife, the IRS allows him to deduct his contributions to her IRA if the MAGI reported on their tax return is $169,000 or less. The IRS allows the person to take a partial deduction if the couple’s MAGI is between $169,000 and $179,000. The taxpayer cannot deduct his IRA contributions if the MAGI on their joint return is $179,000 or higher.