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Workplace Retirement Savers: Know the Tax Rules for Your Traditional IRA

By Rita Williams - Mar 7, 2019 at 3:25PM

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You need to know the income limits if you want a tax deduction.

IRAs are a great way to save for retirement, and traditional IRAs have an additional benefit: They offer a tax deduction in the year of contribution ... if you know the rules.

Many people who save for retirement in a traditional Individual Retirement Account (IRA) are also covered by a retirement plan through work, such as a 401(k). Many more aren't, but have spouses who are. If this applies to you and you want to take a tax deduction on your IRA, you need to know about the income limits.

The ins and outs of IRA deductions

This is especially important because there are no income limits for traditional IRAs if you don't have a workplace retirement plan. That means people who began investing in IRAs before they started contributing to a workplace plan may not realize the limit exists for them.

Piles of $100 bills.

IMAGE SOURCE: GETTY IMAGES.

In 2019, the maximum you're allowed to contribute to an IRA is $6,000 ($7,000 if you're 50 or older). If you're not covered by a work retirement plan, the amount you invest in a traditional IRA can be deducted from your income for the year, meaning you pay less tax. So if your income is $50,000, and you contribute the full $6,000 to a traditional IRA, you'll pay tax on just $44,000.

If you want to, you can still contribute to a traditional IRA if you or your spouse are covered by a plan at work, though you won't be able to deduct the full amount. That said, any gains in your traditional IRA accounts grow tax-free until you withdraw them in retirement, so there is still some tax advantage to you if you contribute.

If you are covered by a retirement plan at work ...

When a 401(k) comes into the mix of your retirement savings, you need to know about IRA income limits. (Note that these limits apply only to your ability to take a tax deduction with a traditional IRA; a Roth is different, as you'll see below.) Just having access to a 401(k) doesn't mean you're covered; to know for sure, check whether the W-2 form you receive has the "retirement plan" box checked, according to the IRS, and if any contributions or withdrawals were made, by you or your company, in the plan year. (Because companies sometimes automatically enroll employees in 401(k)s, it is possible to be covered and not aware of it. Even if you think you know, it's a good idea to check your W-2.)

If you are covered by a 401(k) at work and are a single filer, you can still deduct up to the full amount if your modified adjusted gross income (AGI) is $64,000 or less. If your income is more than $64,000 but less than $74,000, though, you can only take a partial deduction. Once your income hits $74,000 and beyond, you are no longer allowed to take a traditional IRA deduction at all.

If you are married filing jointly and participate in a 401(k) at work, you can still deduct up to the full amount of your IRA contributions in 2019 if your modified household AGI is $103,000 or less. You can take a partial deduction if your modified AGI is over $103,000 but under $123,000. If your modified AGI crosses $123,000, you can no longer take a tax deduction for a traditional IRA.

If your spouse participates in a retirement plan at work ...

If you are married filing jointly and your spouse contributes to a workplace retirement plan, you are limited to a partial deduction if your modified AGI is more than $193,000 but less than $203,000. You cannot take a deduction at all if your modified AGI is $203,000 or more.

Roth IRAs always have income limits

Like traditional IRAs, Roth IRAs are excellent vehicles for retirement savings, but for tax purposes they're treated differently. There are no present-day tax savings on Roth IRA contributions, but the funds will not be taxed when they are withdrawn at retirement. Meanwhile, traditional IRA funds are tax-free now but taxed upon withdrawal.

But while income limits for traditional IRAs only come into play for people who have both a traditional IRA and a retirement plan at work, Roth IRAs always have income limits. That's true whether they are your only retirement savings vehicle or one of many, through your employer or not. Your income affects whether you can contribute to a Roth IRA fully, partially, or not at all -- check here if you need to know the income limits above which Roth contributions are either reduced or cannot be made.

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