A common question is “Can I make a deductible Traditional IRA contribution?” I will try to shed some light on this subject too in this week’s Inside Look at Building Towards Wealth.
Please note, the information contained here is for 2022. While the contribution limits did not change for 2022 the income phase outs did. The information contained applies for 2022 contributions.
I also refer to MAGI or Modified Adjusted Gross Income. If you don’t understand what MAGI is please click this LINK
The first thing we need to determine is do you or your spouse have any earned income?
If the answer is no, then you will not be eligible for a Traditional IRA contribution.
If the answer is “yes” and you did not already contribute money to a Roth IRA, then you can contribute up to $6,000 to the Traditional IRA, $7,000 if you are over the age of 50. It is important that this contribution does not exceed your earned income for the year.
Next, we need to determine if the contribution is deductible.
What is your tax filing status?
If you are married, filing jointly, and you and your spouse are active participants in an employer-sponsored retirement plan, there are stipulations and limits.
So if you are an active participant in an employer-sponsored retirement plan and your MAGI is $129,000 or more, then no deduction is allowed.
If your MAGI is more than $109,000 but less than $129,000, then a partial deduction is allowed.
A full contribution is only allowed if your MAGI is $109,000 or less when filing jointly.
If only your spouse is an active participant in an employer-sponsored retirement plan and, if your MAGI is $214,000 or more, then no deduction will be allowed.
A partial deduction is only allowed in this scenario if your MAGI is more than $204,000 but less than $214,000.
Finally, the only way to get a full deduction in this scenario is if your MAGI is $204,000 or less.
It is also important to note, that a full deduction is possible if neither you nor your spouse are active participants in an employer-sponsored retirement plan.
If you are filing your taxes as single, there are different criteria that need to be followed.
So if you are single and an active participant in an employer-sponsored retirement plan and your MAGI is $78,000 or more, then you will not be allowed a deduction.
If your MAGI is more than $68,000 but less than $78,000, then you are allowed a partial deduction.
The only way to receive a full deduction, when filing as a single person, is to have a MAGI that is $68,000 or less or if you are not an active participant in an employer-sponsored retirement plan.
I hope that this has made it easier to understand whether you can make a deductible contribution to a Traditional IRA. Contribution limits and MAGI income limits are based on the 2022 tax year.
You may still be eligible to contribute for your 2021 tax year. This could reduce the taxes you pay for 2021.
The limits for 2021 are contained in the post Can I make a deductible IRA contribution 2021.
If you would like to review your situation, please set up a time to talk HERE.