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IRA custodians like Kingdom Trust aren’t required to determine whether an IRA contribution can be deducted. Likewise, IRA custodians aren’t responsible for tracking IRA deductions. And while, yes, these areas should be discussed with your tax professional, Kingdom Trust is here to help, too. For starters, we can help IRA holders avoid confusing contribution eligibility with deduction eligibility.
So, let’s outline the difference between IRA contribution eligibility and deductibility.
Contribution eligibility means that you, the IRA holder, (or your spouse if you’re filing a joint return) must have eligible compensation for the tax year. Eligible compensation includes the following:
- wages and salaries,
- self-employment income, and
- nontaxable combat pay for military personnel.
And, for Traditional, SEP and SIMPLE IRAs, you must also be under age 70½. After all, you may no longer contribute to a tax-deferred IRA beginning with the year you reach 70½.
For Roth IRAs, the 70½ rule does not apply, but income limits do. Income limits are based on your modified adjusted gross income (MAGI) and tax filing. The Tax Year 2018 limits are as follows:
- if you’re single or head of household, you must earn less than $120,000 to fully contribute to a Roth IRA;
- if you’re married, filing jointly, or are a qualified widow(er), you must earn less than $189,000 to fully contribute to a Roth; and
- if you’re married, filing separately, you must earn less than $10,000 to fully contribute.
The above is not a complete breakdown, as you may be able to contribute reduced amounts. Visit IRS.gov for the full list of Roth IRA contribution rules.
Switching gears to deductibility, note that tax deductions only apply to Traditional, SEP and SIMPLE IRAs.
Contributions to a Roth IRA may not be deducted. Your IRA deduction eligibility is based on the following factors:
- active participation in an employer-sponsored plan
- tax filing status
If you are participating in or receiving contributions from an employer-sponsored retirement plan, you’re an “active participant.” For this purpose, employer-sponsored retirement plans include
- 401(k) plans, pension plans, profit-sharing plans, and other qualified retirement plans;
- 403(b) plans;
- federal, state or local government plans, excluding 457(b) plans;
- SEP IRAs; and
- SIMPLE IRAs.
You can confirm active participation on your Form W-2; the Retirement plan checkbox in Box 13 should be checked.
If you or your spouse is an active participant, your IRA deductibility will depend on your MAGI. If your MAGI exceeds the maximum amount, no deduction is allowed. However, if your MAGI is equal to or below the minimum amount, you’re eligible to a tax deduction for the full contribution amount up to the limit. This means that MAGI between the minimum and maximum amounts will have some deductibility, though it decreases as it moves toward that maximum amount. This is called the “phase-out range.”
The MAGI limits are as follows for Tax Year 2018 if you, the IRA holder, are an active participant:
- $63,000-73,000 if you’re a singer filer;
- $101,000-121,000 if you’re married, filing a joint return; and
- $0-10,000 if you’re married, filing separate returns.
Otherwise, if your spouse is an active participant but you are not, you must use a different phase-out range. For Tax Year 2018, that range is $189,000-199,000. If neither you nor your spouse is an active participant, all Traditional IRA contributions are deductible, regardless of income level.
It’s up to you and your financial advisor to determine how much you should contribute to your retirement account(s).
The same goes for deductions, as just being eligible for a deduction doesn’t mean you have to take it. Consult your advisor to ensure your actions are in line with your long-term retirement and investing goals.
For more on contribution eligibility and deductibility, consult IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs). In addition to other valuable information, 590-A includes a helpful worksheet for determining MAGI and deductibility.