IRA stands for individual retirement arrangement, although many people refer to IRAs as individual retirement accounts. Whatever you call them, IRAs are special tax-advantaged accounts that encourage you to save for retirement.
There are different kinds of IRAs, each with its own tax rules. For example, traditional, Simple, and Simplified Employee Pension (SEP) IRAs typically allow you to deduct the amount you contribute in the year you invest in the account, while Roth IRA contributions aren’t deductible. But with a Roth IRA, you typically don’t have to pay taxes when you withdraw funds.
Here's what you need to know about each type of IRA, including income limits for making tax-advantaged contributions as well as rules on whether you can deduct the money you put into each account.
Which IRA contributions are tax deductible?
Contributions to traditional IRAs are typically deductible on your income tax return. However, the deductibility of your contribution depends both on whether you have a workplace retirement plan, whether your spouse does, and what your income is. Contributions to a Roth IRA, on the other hand, cannot be deducted, but money can be withdrawn tax free.
Here are the rules for IRA deductions, so you can make more informed choices about investing money in the types of IRAs available to you.
If neither you nor your spouse have a workplace retirement plan, you are allowed to make deductible contributions to a traditional IRA regardless of income level. You can deduct contributions up to the annual limit.
If you or a spouse is covered by a plan at work, such as a 401(k), then your income affects eligibility for deductible contributions. Income limits are based on your modified adjusted gross income (MAGI), which is your adjusted gross income plus certain deductions.
Here are the 2023 income limits for income-tax deductible contributions if a retirement plan personally covers you.
2023 IRA deduction limits if you’re covered by a retirement plan at work
|Filing status||Modified AGI||Deduction amount|
|Single or head of household||$73,000 or less||Full deduction up to annual contribution limit|
|More than $73,000 but less than $83,000||Partial deduction|
|$83,000 or more||No deduction|
|Married filing jointly||$116,000 or less||Full deduction up to annual contribution limit|
|More than $116,000 but less than $136,000||Partial deduction|
|$136,000 or more||No deduction|
|Married filing separately||Less than $10,000||Partial deduction|
|$10,000 or more||No deduction|
And here are the 2023 IRA deduction limits if a retirement plan at work does not personally cover you.
2023 IRA deduction limits if you’re not covered by a retirement plan at work
|Filing status||Modified AGI||Deduction Amount|
|Single, head-of-household or qualifying widow with no workplace plan||Any amount||Full deduction up to annual contribution limit|
|Married filing jointly or separately with a spouse who is not covered by a plan at work
||Any amount||Full deduction up to annual contribution limit|
|Married filing jointly with a spouse who has a workplace plan||$218,000 or less||Full deduction up to annual contribution limit|
|Married filing jointly with a spouse who has a workplace plan||More than $218,000 but less than $228,000 in income||Partial deduction|
|Married filing jointly with a spouse who is covered by a plan at work
||$228,000 or more||No deduction|
|Married filing separately with a spouse who is covered by a plan at work
||Less than $10,000||Partial deduction|
|Married filing separately with a spouse who is covered by a plan at work
||$10,000 or more||No deduction|
If you are not entitled to a deduction for IRA contributions, you still have the option to make nondeductible contributions.
These should be reported on IRS Form 8606. You may wish to do this if you don't qualify for IRA deductions since the money you deposit can still grow tax deferred.
You'll want to let the IRS know if you make nondeductible contributions to avoid being double-taxed on the invested funds you didn't get to claim an upfront deduction for. When you alert the IRS to the fact you're making some contributions with after-tax dollars, part of your future distributions will be tax free to account for this.
Roth IRAs are an alternative to traditional IRAs. Unlike their traditional counterpart, contributions are not deductible when you put money into your account. Your taxable income is not reduced by investing in them. They are still tax-advantaged accounts, though, and you are allowed to take money out of your account as a retiree without having to pay taxes on withdrawals.
It typically makes sense to choose a Roth if you think your tax rate will be higher in retirement. If the reverse is true and you expect your rate to go down as a senior, a traditional IRA could be the better option.
IRA contribution limits
There is a limit on the amount of money you are allowed to contribute to IRAs each year. This is an aggregate limit for both traditional and Roth accounts. For example, if the contribution limit is $6,500, your combined contribution limits to a traditional and Roth account cannot exceed that amount. You can split it up however you would like.
There are also income limits for making Roth contributions at all. So if you earn too much, you aren't allowed to invest in a Roth. This is different from a traditional IRA, where you can still make nondeductible contributions if your earnings exceed the limits for deductible ones.
Here are the contribution limits for different account types.
Traditional IRA contribution limits
In 2023, you can contribute up to $6,500 to a traditional IRA or up to $7,500 if you are age 50 or over. If your taxable compensation for the year is less than this amount, you are allowed to contribute up to the total amount of taxable income you earn.
2023 Roth IRA contribution limits
The maximum amount you can contribute to a Roth varies based on income. The table below shows how much you can contribute based on earnings. Remember, though, that if you contribute to a traditional account, this will reduce the amount you can contribute to a Roth.
|Filing status||Modified AGI||Contribution limit|
|Single, head of household, or married filing separately but did not live with your spouse during the year||Less than $138,000||Up to the annual limit|
|Single, head of household, or married filing separately but did not live with your spouse during the year||$138,000 or more but less than $153,000||A reduced amount|
|Single, head of household, or married filing separately but did not live with your spouse during the year||$153,000 or more||$0|
|Married filing jointly or qualifying widow(er)||Less than $218,000||Up to the annual limit|
|Married filing jointly or qualifying widow(er)||$218,000 or more but less than $228,000||A reduced amount|
|Married filing jointly or qualifying widow(er)||$228,000 or more||$0|
|Married separate filer who lived with your spouse some time during the year||Less than $10,000||A reduced amount|
|Married separate filer who lived with your spouse some time during the year||$10,000 or more||$0|
If you are allowed to contribute but must reduce your amount, here's how you calculate the amount you are allowed to contribute:
- Determine what your MAGI is.
- Subtract a specific amount depending on your filing status. If you're married filing jointly or a qualified widower, the amount is $218,000. If you're married filing separately but lived with your spouse, it is $0. For all other filers, it is $138,000.
- Divide the resulting number by $10,000 if you are married filing jointly, a qualifying widow, or married filing separately and you lived with your spouse during the year. Otherwise, divide by $15,000.
- Multiply the maximum contribution limit by this amount. In 2023, the maximum contribution limit is $6,500 if you are not eligible for catch-up contributions.
- Subtract this number from the maximum contribution limit. That gives you the maximum you could contribute. This could be reduced, however, by any contribution you made to a traditional IRA.
Other types of IRAs
There are also other types of IRAs that you may be able to make deductible contributions to. These are for self-employed individuals and those employed by small businesses that offer these account types instead of 401(k) plans.
- Simple IRAs: You can make a deductible contribution of up to $15,500 in this account in 2023. If you are 50 or over, you are also allowed to make an additional catch-up contribution of $3,500. However, if you contribute to any other employer retirement plan, the total contributions you are allowed to make to all of these retirement plans is $22,500 in 2023 (not including catch-up contributions).
- SEP IRAs: Generally, only employers can contribute to SEP accounts. However, if you are self-employed, you are allowed to open and invest in one. Employers are allowed to make deductible contributions equal to the lesser of 25% of the employee's compensation, or $66,000 in 2023.
What are the tax benefits of contributing to an IRA?
The tax benefits of IRA contributions depend on the account type. If you're eligible based on income, you can deduct contributions to a traditional IRA for the tax year you invest. This reduces your tax bill.
On the other hand, if you contribute to a Roth IRA, no upfront deduction is available. Money can typically be withdrawn tax free from a Roth as a retiree provided certain requirements are fulfilled.
What should you do if your IRA contribution is not deductible?
You may wish to make a contribution to a traditional IRA even if it is not deductible based on income. Your money can still grow tax free in your account even if you make nondeductible contributions. You will want to file IRS Form 8606 to declare your non-deductible contribution so you avoid double taxation.
Can you contribute to your IRA after the tax deadline?
Contributions to an IRA must be made by tax day of the relevant year. For the 2021 tax year, for example, it was possible to make contributions up to April 18, 2022, the tax deadline for submitting 2021 returns.
Investing for your future is important. IRAs can help make saving for later easier because of the tax savings they provide.
You should typically start saving for retirement as soon as possible to benefit from compound interest. You should also generally aim to take advantage of tax breaks if you can so the government can help you grow your nest egg.
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