Once upon a time, the only type of individual retirement account (IRA) that existed was the kind that might have entitled you to an IRA tax deduction for the amount of your annual contribution. That traditional IRA was joined in 1997 by the Roth IRA. Roth IRAs are funded with post-tax money, you don't get a tax deduction for your contributions, and distributions are tax-free as long as the requirements for a Roth IRA have been met. In contrast, traditional IRAs are funded with pre-tax money, you may get a tax deduction on your contributions, and you'll pay taxes on distributions in retirement.
As with most tax breaks, the IRA deduction comes with a few strings attached. Are you eligible for an IRA tax deduction? If so, how much of one? Here's what to keep in mind.
IRA Deduction Limits
Both Roth IRAs and traditional IRAs are subject to an annual cap. For 2019 tax returns, that number is $6,000. And, if you're 50 or older, you can contribute an additional $1,000 as a catch-up contribution, bringing the total to $7,000.
Your income also affects your IRA tax deduction, and different limits apply to different situations. For example, let's say that you (and a spouse, if you're married) are employed and eligible to participate in a retirement plan such as a 401(k) at work. (Note the word "eligible" because this restriction applies even if you're eligible but don't actually participate in your employer's retirement plan.)
In this scenario, you (and your spouse, if applicable) can each take the maximum annual contribution deduction (i.e., $6,000, or $7,000 if you're at least 50) for 2019 tax returns as long as your income doesn't exceed $64,000 for a single individual. If you make between $64,000 and $74,000, the amount of an IRA deduction you're eligible for decreases, or phases out, as your income increases. If your income exceeds $74,000, you aren't eligible for any deduction.
Deductions for Couples
For married couples, the income limit for a full IRA deduction is $103,000. The phase-out range is $103,000 to $123,000, with no deduction available when your combined 2019 income exceeds $123,000.
If you're married and filing jointly, and one spouse is eligible to be in an employer plan and the other is not, the limits that apply to your joint income are much higher: $193,000 for a full deduction that phases out up to $203,000.
On the other hand, if you're married, filing a separate tax return, and are eligible for an employer retirement plan, the phase-out of your eligibility for an IRA tax deduction begins with the first dollar you earn. When your earnings exceed $10,000, you aren't eligible for a deduction.
When You Aren't Eligible for an Employer Plan
If you (and your spouse, if applicable) aren't eligible to participate in an employer plan, there's no income limit for full deductibility of your IRA contribution.
Note: Roth IRAs are also subject to income limits, but that's another story. Also, keep in mind that being ineligible for an IRA deduction doesn't mean you can't put money in an IRA. In fact, if you make non-deductible IRA contributions, when you start taking IRA distributions, the amount of the distribution attributable to non-deductible contributions isn't taxable because that income was already taxed.
When you file taxes, remember that the deadline for making an IRA contribution is the same as the deadline for filing your tax return. Just keep in mind that the aforementioned contribution and income limits will likely continue to fluctuate in years to come. For more information on IRA tax deductions, consider consulting with a tax advisor.
Individual Retirement Accounts (IRAs)