Learn the rules for deducting Traditional IRA contributions for those who do not have a retirement plan offered to them through their employer. Also included are the rules on those who don’t have a plan through work but have a spouse who does have a plan at their employer….(read more)

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Traditional IRA Deductibility Rules – Part 1

Individual Retirement Accounts (IRAs) are a popular way for individuals to save for retirement while also receiving certain tax benefits. Traditional IRAs, in particular, allow for tax-deferred growth of earnings and potentially tax-deductible contributions.

However, not everyone is eligible to take advantage of the tax deduction for their traditional IRA contributions. The IRS has specific rules and income limits that determine whether or not an individual can deduct their contributions from their taxable income.

For the 2021 tax year, the deductibility of traditional IRA contributions is subject to income limits and other factors. These rules can be complex, and it is essential for anyone considering making contributions to a traditional IRA to understand them thoroughly.

The general rule is that if an individual is covered by an employer-sponsored retirement plan, such as a 401(k), their ability to deduct traditional IRA contributions may be limited based on their income. The IRS considers someone to be covered by a retirement plan if they are an active participant in a plan at work, regardless of whether they actually contribute to the plan or not.

For single individuals who are covered by a retirement plan at work, the ability to deduct traditional IRA contributions begins to phase out once their modified adjusted gross income (MAGI) reaches $66,000 in 2021. The deduction is completely phased out once their MAGI reaches $76,000 or more.

For married individuals filing jointly, where the individual making the contributions is covered by a retirement plan, the phase-out begins at a MAGI of $105,000 and is fully phased out at a MAGI of $125,000 or more.

It is important to note that if an individual is not covered by a retirement plan at work, there are no income limits for deducting traditional IRA contributions. This means that anyone can make deductible contributions to a traditional IRA, regardless of their income, if they are not covered by a retirement plan at work.

Additionally, for married individuals filing jointly, where the individual making the contributions is not covered by a retirement plan but their spouse is, the deductibility of traditional IRA contributions begins to phase out at a MAGI of $198,000 and is fully phased out at a MAGI of $208,000 or more.

It is also worth mentioning that individuals who are not eligible to deduct their traditional IRA contributions may still make non-deductible contributions to their traditional IRA. While these contributions do not provide an immediate tax benefit, they can still grow tax-deferred until the funds are withdrawn in retirement.

In summary, the deductibility of traditional IRA contributions is subject to income limits and whether an individual is covered by a retirement plan at work. Understanding these rules is crucial for making informed decisions about retirement savings and tax planning.

In Part 2 of this series, we will explore other factors that can affect the deductibility of traditional IRA contributions, as well as the rules for spousal IRAs and the relationship between traditional IRAs and Roth IRAs.