Income Tax Deductions on Traditional IRA Contributions
By Alexis Gonzalez-del-Valle, CIP, CHSP
Can individuals who contribute to an employer-sponsored retirement plan also contribute to a Traditional IRA?
Yes, an individual can contribute to an employer-sponsored retirement plan and to a Traditional IRA. But claiming a federal income tax deduction for a Traditional IRA contribution may be a different matter. Taking a deduction depends on whether the IRA owner (or the IRA owner’s spouse) is an active participant in an employer-sponsored retirement plan—and on their annual income.
Who is considered an active participant in an employer-sponsored retirement plan?
Individuals are considered active participants if they participate in one of the following retirement plans for any part of the year.
A qualified retirement plan such as a pension, profit sharing, or 401(k) plan (under Internal Revenue Code (IRC) Sec. 401(a))
A qualified annuity plan or tax-sheltered annuity plan (IRC Secs. 403(a) and (b))
A simplified employee pension (SEP) plan
A plan established for its employees by federal, state, or local governments (not including a plan under IRC Sec. 457(b))
A savings incentive match plan for employees of small employers (SIMPLE IRA) plan
IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), explains active participation for Traditional IRA contribution deduction purposes. Individuals can also review Form W-2, Wage and Tax Statement, which they receive from employers each year. If “Retirement plan” in Box 13 of Form W-2 is marked, then the individual is considered an active participant in an employer-sponsored retirement plan for that tax year .
What happens if individuals (or spouses) are active participants in an employer-sponsored retirement plan?
Active participants must determine their modified adjusted gross income (MAGI) to see whether they can deduct their IRA contribution; if their income is above a certain threshold, they cannot deduct. For most people, their modified adjusted gross income is the same as their adjusted gross income (AGI). But it may be different, depending on various claimed credits and deductions. So IRA owners should seek competent tax advice or review IRS Publication 590-A, which includes a worksheet to calculate MAGI.
The following chart shows the 2022 and 2023 Traditional IRA deductibility MAGI phase-out ranges for active participants. The phase-out ranges change each year for cost-of-living adjustments.
Traditional IRA Deductibility MAGI Phase-Out Ranges
If an individual’s MAGI is less than the lower threshold of the applicable phase-out range, then the entire Traditional IRA contribution is deductible. For example, if a single, active participant had MAGI in 2023 of $73,000 or less, the whole contribution would be deductible. On the other hand, if an individual’s MAGI is greater than the higher threshold of the applicable phase-out range, then none of the Traditional IRA contribution is deductible. So a single, active participant with MAGI of $83,000 or more could take no deduction. If an individual’s MAGI is within the applicable phase-out range, then only a portion of the contribution is deductible. IRS Publication 590-A also contains a worksheet to determine the deductible amount when MAGI is within the applicable phase-out range.
If an individual is not an active participant but the spouse is, use the threshold on the right-hand side of the chart. In this case, the nonactive participant/spouse would use that higher threshold and the active participant/spouse would use threshold in the middle column (Married, filing jointly). Note that married couples filing separate tax returns are effectively barred from deducting IRA contribution because of the low income threshold.
How is Traditional IRA contribution deductibility affected if neither the IRA owner nor the IRA owner’s spouse is an active participant in an employer-sponsored retirement plan?
If neither the IRA owner nor the IRA owner’s spouse is an active participant in an employer-sponsored retirement plan, then the Traditional IRA contribution is fully deductible, regardless of the amount of the MAGI.
If the IRA owner is not eligible to make a deductible Traditional IRA contribution, what are other options that the IRA owner may want to consider?
The IRA owner may make a nondeductible (after-tax) contribution to a Traditional IRA. Individuals must track nondeductible IRA contributions by filing IRS Form 8606, Nondeductible IRAs, with their tax return. Alternatively, eligible individuals may contribute to a Roth IRA, for which no deductions are permitted, but which provides the benefit of potentially tax-free earnings.
IRA owners with IRA deductibility questions should seek competent tax advice and can be referred to IRS Publication 590-A for additional information.
