Please ensure Javascript is enabled for purposes of website accessibility

Can You Take an IRA Tax Deduction Right Now?

By Dan Caplinger – Updated Feb 15, 2017 at 11:40AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Many people use IRAs to try to cut their taxes. Find out whether you're eligible for an IRA tax deduction.

As tax season rolls on, millions of Americans wonder if there's anything they can do to cut their taxes. Contributing to a traditional IRA is one way that many people can produce tax savings, as an IRA tax deduction applies for traditional IRAs. But not everyone is eligible to take an IRA tax deduction. Let's take a closer look at the rules to see how they apply to taxpayers in various situations.

Image: Gold Footpath by George Hodan.

Roth IRAs: No IRA tax deduction
First and foremost, it's important to realize that Roth IRAs aren't eligible for an IRA tax deduction. As a trade-off, those who open Roth IRAs get tax-free treatment of their income when they make withdrawals in retirement, unlike traditional IRAs, for which distributions are generally taxable. But if you really just want the deduction, a traditional IRA is your only option.

Income limits for the IRA tax deduction
Even if you use a traditional IRA, you might not be able to take an IRA tax deduction. Your eligibility depends on your marital status and whether you or your spouse has a retirement plan available at work.

If you're single and don't have a retirement plan at work, your IRA contribution is entirely deductible. Similarly, married couples where neither spouse has access to a retirement plan get full deductions as well. The idea here is that if your IRA is your only retirement plan, the government wants to encourage you to use it fully.

If you or your spouse has a retirement plan at work, then income limits can reduce or eliminate your IRA tax deduction. For the 2013 tax year, if you're single and have retirement-plan access, then deductions begin to phase out between income levels of $59,000 and $69,000, with no deduction allowed at all above $69,000. For married taxpayers, the phase-out range is $95,000 to $115,000.

Finally, if you're not covered but your spouse is, then a different income limit applies to your IRA. For 2013, the phase-out range for joint filers is from $178,000 to $188,000.

The net effect of the phase-out ranges is to reduce your maximum deductible contribution proportionally. So if you're single and earn $64,000 or married and earn $105,000, you're halfway through the range and can only deduct half of the maximum $5,500 contribution amount for 2013 or $2,750 for those under age 50. Those 50 or older get an extra $1,000 catch-up contribution, and that boosts the maximum deductible amount in this example to $3,250.

You can still contribute to an IRA
Despite these income limits, there's never any restriction against contributing the maximum available amount to a traditional IRA. The only question is the extent to which you can get an IRA tax deduction. Nondeductible contributions obviously aren't as valuable for taxpayers, but they can still be a smart way to save for retirement and reap at least some of the benefits of IRAs, including tax-deferred growth.

Use your IRAs as well as you can
IRAs are a great way to save on your taxes, and you have until April 15 to make a contribution to a traditional IRA in order to get an IRA tax deduction on your 2013 tax return. By knowing the rules that apply to deductibility, you won't get hit with nasty surprises when you file.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.