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Here's When the IRS Can Take Your IRA Tax Deduction Away

By Dan Caplinger - Jan 27, 2020 at 7:03AM

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There are some cases where a contribution won't be deductible on your taxes.

The biggest reason people contribute to IRAs is to get a tax deduction on their contributions. Traditional IRAs offer most taxpayers an up-front deduction when they make that contribution, letting people wait to pay tax until they withdraw money from their IRAs in retirement.

However, some people are surprised to learn that they might not actually receive a tax deduction for a traditional IRA contribution. The IRS follows the tax laws that the federal government enacts, and taxpayers whose income levels rise above certain limits have to deal with the denial of up-front tax breaks for their retirement savings. Below, we'll give you more details about when the IRS won't let you take a deduction and what you can do about it.

Traffic light next to Internal Revenue Service plaque on concrete wall.

Image source: Getty Images.

Losing your deduction

It's pretty uncommon for retirement savers not to get to deduct a contribution to a traditional IRA. For those families without any access to a retirement plan at work, such as a 401(k) or similar employer-sponsored plan, there's nothing to worry about: anyone can deduct their traditional IRA contributions regardless of income.

However, if you or your spouse has retirement plan coverage, then there are situations in which you can't deduct your contribution to a traditional IRA. Threshold income levels apply, with different numbers depending on whether it's you or your spouse that has employer plan coverage.

If you have a workplace plan available to you, then the following chart applies. If your modified adjusted gross income is above the numbers below, then all or part of your traditional IRA contribution might become nondeductible.

For This Filing Status:

2019 Deductions Are Reduced in This Income Range or Eliminated Above It:

2020 Deductions Are Reduced in This Income Range or Eliminated Above It:

Single, head of household, or married filing separately if you didn't live with your spouse during the year

$64,000 to $74,000

$65,000 to $75,000

Married filing jointly or qualifying widow or widower

$103,000 to $123,000

$104,000 to $124,000

Married filing separately if you lived with your spouse at any point during the year

$0 to $10,000

$0 to $10,000

Data source: IRS.

If it's just your spouse who has access to a workplace retirement plan rather than you, then different income limits apply as follows:

For This Filing Status:

2019 Deductions Are Reduced in This Income Range or Eliminated Above It:

2020 Deductions Are Reduced in This Income Range or Eliminated Above It:

Married filing jointly

$193,000 to $203,000

$196,000 to $206,000

Married filing separately IF you lived with your spouse at any point during the year

$0 to $10,000

$0 to $10,000

Data source: IRS.

If my income's too high, is there any point to contributing to a traditional IRA?

The obvious first thought if you can't deduct your traditional IRA contribution is that you might as well make a Roth IRA contribution instead. Roth contributions don't get an up-front deduction either, but withdrawals are tax-free in retirement. That's a better outcome than contributing to a traditional IRA, because even though you won't have to pay taxes on the after-tax money you contribute, you will pay tax on the income it generates.

There is a way to use a nondeductible traditional IRA contribution to get money into a Roth IRA. Known as the backdoor Roth strategy, the two-step process starts with a traditional IRA contribution and ends by converting that traditional IRA to a Roth IRA. However, the strategy only works well if you have no other traditional IRAs for which you did get a deduction on contributions in the past.

Be tax-smart

Because workplace retirement plans are responsible for making IRA contributions nondeductible in some cases, the most logical alternative is to boost your savings within your workplace retirement plan. There's no income limit on deducting contributions to 401(k)s or similar retirement plans. Still, for those doing last-minute tax planning in hopes of getting a deduction for traditional IRA contributions, knowing the rules above can help you avoid a big potential mistake.

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