Deducting IRA Savings (Pt. 1)

Submitted by Jim Blankenship on Wednesday, February 11, 2015 - 12:00pm
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Your pay not only determines the size of your nest egg when you retire but also restricts how much you save annually without penalty. Here are your limits for 2015, based on how you file your tax return.

Income limits determining your maximum contribution to retirement savings depend on whether you file your federal income tax return in the status category of single, married filing jointly (MFJ), married filing separately (MFS), as a head of a household (HH) or as a qualifying widow or widower.

The higher your 2015 modified adjusted gross income (MAGI), generally the more the deductible amount of your contribution to an individual retirement plan drops, possibly to where you can’t contribute at all.

Let’s first look at your income limits if you file taxes using the single or HH status.

Traditional IRA. If you are not covered by a retirement plan at your job or you are covered by such a workplace plan and your MAGI is $61,000 or less, you have no limit to your deductible contributions.

If you are covered at your job and your MAGI falls between $61,000 and $71,000, you receive a partial deduction that is reduced by 55 cents for every dollar over the $61,000 lower limit (65% if you’re older than 50).

As in all scenarios discussed here, the above adjusted amount is rounded up to the nearest $10; if it’s less than $200, you can contribute at least $200.

If your workplace plan covers you and your MAGI exceeds $71,000, you can’t deduct contributions to a traditional IRA. You are eligible to make non-deductible contributions up the annual limit for the account, of course, and those contributions grow tax-free.

Roth IRA. If your MAGI comes in under $116,000, you qualify to contribute the entire amount to a Roth IRA. If your MAGI is between $116,000 and $131,000, your contribution deduction shrinks pro rata for every dollar above the lower end of that range. If your MAGI tops $131,000, you cannot contribute to a Roth IRA.

Other statuses. Filing in the MFJ or qualifying widow or widower categories slightly complicates deductions for contributing to a traditional IRA.

If you are not covered by a retirement plan at your job and your spouse is also not covered with a plan, you have no MAGI limit on your deductible contributions to a traditional IRA, nor do you face a limit if your MAGI is $98,000 or less.

If covered under a retirement plan at your job and you earned a 2014 MAGI between $98,000 and $118,000, you can take a partial deduction that drops 27.5% for every dollar over the lower threshold (32.5% if you’re older than 50).

If you are covered at your job and your MAGI exceeds $118,000, you cannot deduct any of your traditional IRA contributions for this tax year, though again you can make non-deductible contributions up the annual limit.

Spousal coverage in workplace plans figures in here. For instance, if your workplace plan doesn’t cover you but your spouse is covered at his or her job and your MAGI is less than $183,000, you can deduct the full amount of your IRA contributions. If your MAGI is greater than $183,000 but less than $193,000 in these circumstances, you are entitled to a deduction that’s reduced 55% for every dollar over the lower limit (65% if over 50).

If your MAGI is greater than $193,000, you can’t deduct any of your traditional IRA contributions.

(Our next article looks at income limits for Roth IRA contributions if you file MFJ or as a qualifying surviving spouse, as well as limits for kicking in to traditional or Roth plans if you file taxes in the MFS category.)

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Jim Blankenship, CFP, EA, is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is the author of An IRA Owner’s Manual and A Social Security Owner’s Manual. His blog is Getting Your Financial Ducks In A Row, where he writes regularly about taxes, retirement savings and Social Security.

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