Have you ever made contributions to an IRA account, then wondered if you can deduct that investment from your taxes? The simple answer yes, you can, but only in some cases.
It all depends on what kind of IRA you contribute to, and in some cases your income level, and if you are covered by an employer-run retirement account or not. This article explains the four types of IRAs an individual or couple can invest in, and how deductions work for each. Let's start with the most complicated one.
Traditional IRAs
Traditional IRAs are broken down into two categories: deductible and non-deductible. If you are already contributing to one of these IRAs, this makes it easier. If your traditional IRA is non-deductible, it means you didn't qualify for tax deductions. If it is deductible, then it's just a question of if you can deduct the full amount contributed on your taxes, or only partial.
There are 2 scenarios, depending on if you are enrolled in a work retirement plan, or if you are not. You qualify for full deductions if you aren't enrolled in a retirement plan at work, and your filing status is -
- Single, head of household, or qualifying widow(er)
- Married filing jointly, or separately with a spouse who is not covered by a plan at work
- Married filing jointly with a spouse who is covered by work plan, with a modified AGI of $184,000 or less.
If you are enrolled in a retirement plan at work (401(k) for example) then it depends on your modified AGI. You can still qualify for full deductions if your filing status is -
- Single or head of household, and your modified AGI is $61,000 or less.
- Married filing jointly or qualified widow(er), with a modified AGI of $98,000 or less.
And finally partial deductions exist, if you barely exceed these modified AGI limits. If you are filing as single or head of household, you get partial deductions if your modified AGI is more than $61,000 but less than $71,000. For married filing jointly or qualified widow(er), the partial deduction window for modified AGI is more than $98,000 but less than $118,000.
Anything over $71,000 for single filers, or $118,000 or joint filers, and you cannot get a deduction for traditional IRA deductions, if you are enrolled in your company's retirement plan at work.
All that said, the maximum amount you can contribute to your IRA is $5,500 a year. Or $6,500 if you're 50 or older. Unless you makes less than either of those figures. For example, if your modified AGI is only $3000 in a year, then that's the maximum you are allowed to contribute. That's for the tax years of 2015, 2016 and 2017. And that's for both your traditional IRA, and your Roth IRA combined.
Roth IRAs
This one is very simple in comparison. Any contributions to a Roth IRA cannot be deducted from your taxes. So, if you are deciding to contribute to both a traditional and a Roth IRA for savings, please know that the combined limit is $5,500 (or $1000 more if you are 50 or older). So if the main goal is tax deductions, go for traditional IRAs.
SEP IRAs
SEP, or Simplified Employee Pension IRAs are a very attractive option for some. They are a special type of traditional IRAs, specifically for self-employed individuals or small business owners. You can deduct up to 25% of contributions made into a SEP IRA, or $53,000, whichever number is less. For 2017, that number increases to $54,000.
Here are 3 articles I recommend giving a good read, for more in-depth analysis of this option, if you are self-employed, or are a small business owner.
CNN Money's Guide To Retirement section - What Is A SEP IRA?
IRS official answer - SEP Contribution Limits (including grandfathered SARSEPs)
A very thorough article on the subject - Tax Planning with Simplified Employee Pension (SEP) Plans
SIMPLE IRAs
SIMPLE IRAs are also a special kind of traditional IRA, made again for small business owners and the self-employed. Though they work differently. To answer the question of if you can deduct SIMPLE IRA contributions from your taxes, you cannot.
But this Motley Fool article outlines a way of thinking about SIMPLE IRA contributions, to where the net effect of investing could turn out to be the same thing as a tax deduction. So it's worth a read for sure.