In this article, we focus on the benefits of making contributions to your traditional IRA and the guidelines that determine whether or not you are able to take a tax deduction for those contributions.
Tutorial: Traditional IRA
First let’s review some of the contribution rules that apply to participant contributions for traditional IRAs.
For any tax year, you may be able to claim a deduction on individual federal income tax for the money you contribute to your IRA. See below for the limits for 2018 and 2019.
Spousal IRA Contribution
You may contribute to a spousal IRA on behalf of your non-working spouse. The limits discussed above apply. Remember that if you also contribute to an IRA for yourself, both IRAs must be maintained as separate accounts, as IRAs cannot be held jointly. Of course, in order for you to make a spousal IRA contribution, you and your spouse must file a joint income tax return. Your combined contribution should not be more than the amount of taxable compensation you report on your tax return. (For more, check out Making Spousal IRA Contributions.)
IRA participant contributions for a specific tax year must be made by April 15 of the following year, the date that taxes for the previous year are due. If April 15 falls on a weekend or other holiday, the deadline is the next business day. (It was Tuesday, April 17, 2018, for the 2017 tax year, for example. For the 2018 tax year, the deadline will go back to April 15, 2019.) Contributions postmarked on or before April 15 are considered to be made by the deadline.
Making Your Contribution After You File Your Tax Return
Your IRA contribution for the tax year can be made at any time between Jan. 1 of that year and April 15 (or whatever that year’s tax deadline is) of the following year, even if you filed your income-tax return before the April 15 tax deadline. Should you decide to make your contribution after you file your tax return, be sure to inform your tax professional so that if the contribution was not included on your return an amended return that includes the contribution can be filed.
You may not make a participant contribution to a traditional IRA starting from the year you attain age 70½. You may, however, make a contribution for the preceding year. For example, if you reach age 70½ in 2019 you are not allowed to make a contribution for the 2019 tax year; however, you could make a contribution between January 1 and April 17, 2019, for the 2018 tax year.
Indicate Tax Year on Check
If you are one of the many taxpayers who will take advantage of the 3½-month extension (i.e. the deadline of April 15) to make an IRA participant contribution for the preceding year, be sure to indicate the applicable year on your check or any accompanying contribution form. If you do not provide this information, your IRA custodian/trustee will not be able to determine the year for which you want the contribution to be made and will therefore likely report the contribution for the tax year in which they receive the check.
Deducting Your traditional IRA Contribution
Being able to take a tax deduction for a contribution to your traditional IRA depends on several factors, namely your modified adjusted gross income, your tax-filing status and your participant status (i.e. whether or not you are considered an “active participant,” as the IRS puts it).
Active Participant Defined
The rules vary among the different plans. For example, you are considered an active participant in a profit-sharing plan for the year your employer deposits the contribution to your retirement account, even if the contribution is being made for a different year. (Employers have until their tax-filing deadline plus extensions to make contributions; therefore, a contribution for 2018 may be made in 2019.) For participation in a money purchase pension plan, you are considered an active participant for the year you are entitled to receive the contribution, regardless of when the contribution is made. For a 401(k), you (or your spouse) are considered an active participant in years when you contribute to the plan.
Your employer should indicate if you are an active participant, by checking the “Retirement Plan Box” on your Form W-2. If you are unsure of your status, check with your employer or your tax professional.
If you are married and neither you nor your spouse is an active participant, you may take a tax deduction for the full contribution amount. If one of you is an active participant, then your income and tax filing status determines whether or not you are allowed to take a tax deduction for the contribution.
So Can You Deduct Your Contribution?
Use the following chart as a guideline to determine if you are able to get a tax deduction for the amount you contribute. Note that these thresholds change every year. The following limits applied to tax years 2018 and 2019 (if no difference is noted, the limits are the same for both years). “Inactive” means the individual is not an active participant in an employer-sponsored retirement plan, as described above.
|traditional IRA Deductibility Limit For 2019/2018|
|Tax Filing Status||Active Participant Status||Modified Adjusted Gross Income||Deduction Allowed|
|Single or Head of Household||Individual is inactive||No limit||Full deduction|
|Individual is active||$64,000 (2019)/ $63,000 (2018) or less||Full deduction|
More than $64,000 but less than $74,000 (2019)
More than $63,000 but less than$73,000 (2018)
|$74,000 (2019)/$73,000 (2018) or more||No deduction|
Married Filing Jointly/
|Individual is inactive, Individual’s spouse is inactive||No limit||Full deduction|
|Individual is active||$103,000 (2019)/$101,000 (2018) or less||Full deduction|
More than $103,000 but less than $123,000 (2019)
More than $101,000 but less than $121,000 (2018)
|$123,000 (2019)/ $121,000 (2018) or more||No deduction|
|Individual is inactive, Individual’s spouse is active||$193,000 (2019)/$189,000 (2018) or less||Full deduction|
More than $193,000 but less than $203,000 (2019)
More than $189,000 but less than $199,000 (2018)
|$203,000 (2019)/$199,000 (2018) or more||No deduction|
|Married Filing Separately||Individual is inactive, Individual’s spouse is inactive||No Limit||Full deduction|
|Individual is active *1||$10,000 or less||Partial deduction|
|$10,000 or more||No deduction|
|Individual is inactive, Individual’s spouse is active *2||$10,000 or less||Partial deduction|
|$10,000 or more||No deduction|
|*1. If you and your spouse did not live together at any time during the year, then you are considered “single” for tax-filing purposes and should use the guidelines for a single taxpayer.
*2. If you and your spouse did not live together at any time during the year, you are allowed a full deduction.
If you are allowed only partial tax deduction, your tax professional should be able to help you calculate your deductible amount. Taxpayers who are not allowed a deduction or only a partial deduction may consider making a non-deductible contribution to a traditional IRA or a contribution to a Roth IRA (if they meet the income qualifications).
The Bottom Line
Many factors determine the decisions a taxpayer makes about saving for his/her retirement, and whether a contribution is deductible is only one of these factors. What may be ideal for another person may not be ideal for you. As such, you want to work with a financial planner and/or retirement consultant to ensure that you make the choices that are suitable for your retirement profile. (For related reading, check out Turn Small Savings Into A Big Nest Egg.)