Are IRA Contributions Tax Deductible?

By Melissa Finnegan0 Comments
 
Calculating tax deductionsAre you looking for a potential tax deduction for this past year or to potentially lower your taxes in the future? If so, certain retirement account contribution(s) may qualify for a tax deduction if you meet IRS eligibility requirements.

The ability to receive a tax deduction on IRA contributions depends on a variety of factors, such as the type of account, whether you’re covered by an employer-sponsored retirement plan, and your income. If you’re married and file jointly, and whether your spouse is covered by an employer-sponsored retirement plan is also a factor.

The IRS requirements to be eligible for a tax deduction on Traditional IRA contributions are outlined in more detail below, along with several other tax-deferred accounts with the potential for tax-deductible contributions.

Please note: If you have a Roth IRA, contributions are not tax deductible and are considered “after-tax” contributions. But, due to the tax treatment of Roth accounts, investments and withdrawals are tax-free after certain IRS requirements are met.

Traditional IRA Tax Deduction Eligibility Overview


1. Employer-Sponsored Retirement Plan

If you are not covered by a retirement plan at work, your contribution is deductible in full. If you (or your spouse if filing jointly) are covered by a retirement plan at work, your deduction may be limited based on your income.

2. Income

If you are covered by a retirement plan at your place of work, your Modified Adjusted Gross Income (MAGI) will affect the amount you are eligible to deduct.

2018 Traditional IRA Deduction Limits - If You Are Covered by a Retirement Plan at Work

Filing Status MAGI Deduction
Single or head of household $63,000 or less A full deduction up to the amount of your contribution limit
  Between $63,000 and $73,000 A partial deduction
  $73,000 or more No deduction
Married filing jointly or qualifying widow(er) $101,000 or less A full deduction up to the amount of your contribution limit
  Between $101,000 and $121,000 A partial deduction
  $121,000 or more No deduction
Married filing separately Less than $10,000 A partial deduction
  $10,000 or more No deduction
 

2018 IRA Deduction Limits - If You Are Not Covered by a Retirement Plan at Work

Filing Status MAGI Deduction
Single, head of household, or qualifying widow(er) Any amount/no limit A full deduction up to the amount of your contribution limit
Married filing jointly, or separately with a spouse who is not covered by a plan at work Any amount/no limit A full deduction up to the amount of your contribution limit
Married filing jointly with a spouse who is covered by a plan at work $189,000 or less A full deduction up to the amount of your contribution limit
  Between $189,000 and $199,000 A partial deduction
  $199,000 or more No deduction
Married filing separately with a spouse who is covered by a plan at work Less than $10,000 A partial deduction
  $10,000 or more No deduction
Source: IRS.gov

Those seeking potential tax deductions for 2018 have until the April 15 tax filing deadline to make a contribution. For 2019 contribution and deduction limits, review this free infographic or visit the IRS website.


Account Options for Individuals Seeking Potential Tax Deductions

  • Traditional IRA

If you qualify, per the eligibility requirements outlined above, contributions to a Traditional IRA may be deductible up to the contribution limit. Contributions to a Traditional IRA are generally made with pre-tax dollars, investments within the IRA grow tax-deferred, and taxes are paid on the money/earnings when withdrawn.
  • Health Savings Account (HSA)

Compared to Traditional IRAs, HSAs are often an overlooked source of potential tax deductions for individuals. Contributions to an HSA are tax deductible, even if you don’t itemize your deductions, as long as the contributions were not made by an employer.

Potential tax deductions are just one of the “triple tax benefits” we highlight in the HSA Education Center, so if you are looking for tax deductions for this past year and have a high deductible health plan, consider opening and contributing to an HSA.

Account Options for Business Owners Seeking Potential Tax Deductions


If you own a business, you may be eligible for retirement plans with potentially larger contribution and deduction limits, in addition to an IRA and/or HSA. Schedule a consultation with an Equity Trust Senior Account Executive to discuss account options for your business with the freedom to invest beyond the stock market, including alternative assets such as real estate, notes/private debt, private equity, and more.
  • Simplified Employee Pension (SEP)

If you are self-employed or own a business with up to 25 employees, you may be eligible to establish a SEP IRA. Employer contributions to a SEP IRA are generally tax deductible, subject to certain requirements and annual limits.

According to the IRS, the most you can deduct on your business’s tax return for SEP IRA contributions is the lesser of 25 percent of employee compensation or the annual contribution limit. If you are self-employed and contribute to your own SEP-IRA, there is a specific computation to determine the maximum deduction.[1]
  • Savings Incentive Match Plan for Employees (SIMPLE)

The SIMPLE is an incentive-match plan designed for small businesses, generally with 100 or fewer employees, who have no other qualified plans. Employers contribute a percent-based salary match (1-3%) and employees may elect to contribute through salary deferral. As the employer, you may deduct contributions made to employees’ SIMPLE IRAs on your business tax return. However, employee participants cannot deduct contributions to their SIMPLE IRA.[2]
  • Solo 401(k)

A Solo 401(k) combines elements of the SEP and SIMPLE accounts and provides business owners the opportunity to contribute as both the employer and employee with potentially higher contribution and deduction limits. Designed for owner-only businesses, a Solo 401(k) can be established by both incorporated and unincorporated businesses, sole proprietorships, partnerships and corporations.

The only employees must be self-employed partners and their spouses. Contribution deadlines for a Solo 401(k) are the last day of the calendar year. Therefore, unlike other accounts, the contribution deadline for those seeking potential tax deductions for the 2018 tax year passed on December 31, 2018.[3]

Self-Directing Your Tax-Deductible Accounts

With a self-directed IRA custodian such as Equity Trust, individuals and business owners have the opportunity to invest in alternatives outside of traditional assets like stocks, bonds and mutual funds. Whether you have experience in real estate, private equity, precious metals, or cryptocurrency, it’s possible to build wealth for retirement by investing in what you know best with your tax-advantaged account(s).

What are your plans for reducing your tax burden?

Visit Equity Trust’s Tax Time Resource Center
 

Equity Trust is a passive custodian and does not provide tax, legal or investment advice. Any information communicated by Equity Trust is for educational purposes only, and should not be construed as tax, legal or investment advice. Whenever making an investment decision, please consult with your tax attorney or financial professional.