If you can make a tax deductible IRA contribution, it can be one of the best financial moves available. Not only do you get an immediate tax savings, you also take advantage of tax deferred investment growth for years to come. What’s not to like?
The question is – are you eligible to make deductible retirement contributions to your IRA? Let’s take a look.
First, let’s get a handle on the IRA ground rules. They are fairly straight forward but you do have to pay attention to the nuances. The basic rule is that you can contribute up to $5,500 or 100% of your earned income whichever is less to an IRA ($6,500 if you are age 50 or more). Let’s keep going.
You have to make your IRA contribution by April 15th in the year you file your return. So for tax year 2014, your deadline is April 15th 2015. You have to adhere to this deadline even if you file for an extension.
Is the contribution always deductible?
Sadly….no. If you (or your spouse) can contribute to a plan at work and your income exceeds certain levels, the deductibility of your IRA contribution phases out. Note – it doesn’t matter if you take advantage of the plan at work or not. As long as you are eligible to contribute to a retirement plan at work, you are subject to deductibility limits. This one is one of the reasons I strongly suggest you contribute to retirement plans at work if they are available – even if there is no match.
How do those phase outs work? If you are single and your income is below $60,000, you can make a fully deductible IRA contribution even if there is a plan available at work. Between $60,000 and $70,000 the deductibility of your contribution phases out. If you are married filing jointly and you have a plan at work, your phaseout starts at $96,000. And in this case, none of your contribution is deductible if you earn $116,000 or more. If you have no plan at work but your spouse does, the phase out becomes active if the couple’s earnings top $181,000 and is completely eliminated at $191,000 in joint income.
What does the IRS consider as income?
“Income” for purposes of determining how large an IRA contribution you can make is made up of wages, salaries, fees, commissions and bonuses according the Investors Business’ Daily*. Also included are taxable alimony and support payments.
The good news is that Social security, pensions, investment and annuity income don’t count. Disability and unemployment don’t count either. Neither does income from rental properties. The only exception is if you are in the real estate business.
Most of this seems logical to me but there is one rule that makes absolutely no sense. That rules stipulates that once you turn age 70 ½ (the year you have to start withdrawing your Required Minimum Distributions) you can’t contribute to an IRA. It’s a dumb rule but a rule you must follow none the less.
Are you making a deductible IRA contribution this year? Why or why not?