IRA Deductions

Amounts you contribute to a traditional individual retirement account (IRA) may be eligible for a full or partial deduction from your taxable income for the year of contribution. If you qualify, this provides an immediate benefit because of the tax savings it provides. The tax break you get for contributing to a traditional IRA depends on a number of factors, which may include your income level, filing status, and whether you are covered by an employer's retirement plan.

If you are covered by your employer's retirement plan and you file your tax return as married filing jointly, your deduction for your IRA contribution is phased-out if your adjusted gross income is between $89,000 and $109,000 in 2009 (between $85,000 and $105,000 in 2008). If you are not covered by an employer's plan, but your spouse is, the amounts are different. For 2009, the maximum deductible IRA contribution is phased-out when adjusted gross income is between $166,000 to $176,000 ($159,000 to $169,000 in 2008).

If you are covered by your employer's retirement plan and you file your tax return as single or head of household, your deduction for your IRA contribution is phased-out when your adjusted gross income is between $55,000 and $65,000 in 2009 (between $53,000 and $63,000 in 2008).

What if you or your spouse are covered by an employer's retirement plan and you file your tax return as married filing separately? In that case, your deduction for your IRA contribution is phased-out when your adjusted gross income is between $0 and $10,000. Unlike the other income amounts for the IRA contribution deduction, these amounts are not adjusted for inflation.

Financial Calculators To help you see the benefits of saving via this method, use this Traditional IRA Calculator.

Nondeductible contributions. Although your tax deduction for IRA contributions may be reduced or eliminated, you can still make a nondeductible contribution up to the annual limit (e.g., in 2008 or 2009, the lesser of $5,000 or your compensation for the year). You still get the benefit of having your money grow toward retirement on a tax-deferred basis.

Planning Tools To designate contributions as nondeductible, you must include in your annual tax return IRS form 8606, which you can download. If you want to, you can also designate otherwise deductible contributions as nondeductible contributions. Failure to file Form 8606 will result in a $50 penalty unless you can prove it was due to reasonable cause. More importantly, the IRS will automatically treat contributions as deductible unless it gets Form 8606, and then the burden is on you to unravel the mess that is created when the IRS discovers the contributions were not deductible.