Can I Deduct IRA Contributions and Receive a Lower AGI?

If you contribute to an IRA, you may be able to deduct your contributions -- depending on a few factors. First of all, only contributions to a traditional IRA are deductible – Roth IRA contributions cannot be deducted under any circumstances. In addition to that, your ability to take a deduction depends on your income, and whether or not you are covered by an employer's retirement plan at work. Here's a rundown of the traditional IRA deduction, and how to determine if you qualify.

The traditional IRA deduction

This is actually not a tax deduction -- at least not in the usual sense of the term. Rather, qualified retirement contributions are considered to be adjustments to income. Also known as "above-the-line" deductions, adjustments to income can be taken whether or not you choose to itemize deductions on your tax return. After subtracting all of your adjustments to income from your gross income, you're left with, appropriately, your adjusted gross income, or AGI.

As of the 2016 tax year, individuals can potentially deduct up to $5,500 in traditional IRA contributions. Account owners age 50 and older can contribute an additional $1,000 as a catch-up contribution, for a total of $6,500.

Income limits and phaseout

I deliberately used the word "potentially" in that last paragraph because not everyone can use traditional IRA contributions as an adjustment to income. The ability to do so depends on your income, and whether or not you can participate in a retirement plan at work.

If you're single, and don't have access to a retirement plan at work, there is no income limitation. You can deduct your traditional IRA contributions regardless of your income. The same applies if you're married, and both you and your spouse are not covered by an employer's plan.

If you're married and not covered by a retirement plan at work, but your spouse is, you can still take a full IRA deduction as long as your modified AGI is $184,000 or less. You can take a partial deduction with a modified AGI of less than $194,000, and the deduction disappears completely above that threshold.

If you're covered by a retirement plan at work, here are the income thresholds:

If you're in the range for a partial deduction, you can use Worksheet 2 in Appendix B of IRS Publication 590a to calculate the amount of traditional IRA contributions you can deduct.

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