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Call us today!
1-800-472-1043

A Self-Directed IRA
Company That Earns
Your Trust

A Self-Directed IRA
Company That Earns
Your Trust

Call us today!

1-800-472-1043

One low fee
starting at
$180 per year

Take control
of your
retirement funds

Invest in what
you know
and trust

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This article orignally appeared on Forbes.com -

In general, one may be able to claim a deduction on their individual federal income tax return for the amount contributed to a pre-tax Individual retirement account (“IRA”), also known as a Traditional IRA.  Whereas, after tax or Roth IRA contributions are not tax deductible.  For 2017, the maximum IRA contribution is $5500 and $6500 if over the age of fifty. However, in the case of an individual that is covered by an employer qualified retirement plan, such as 401(k) plan, the IRA contribution amount that individual can deduct could be limited by his or her modified adjusted gross income (“AGI”).  An individual’s AGI is essentially the amount of gross income earned during the year, less certain adjustments. One can find the allowable reductions to your income on the front page of IRS Form 1040.

The two key factors in determining the amount an individual can deduct from their pre-tax Traditional IRA contribution in a given year are (i) whether the individual is covered by an employer 401(k) plan and (ii) their AGI. For individuals that are not covered by an employer 401(k) plan, they are free to deduct the full amount of their IRA contribution up to $5500 or $6500, if over the age of fifty, for 2017.  For example, if Bill Gates was no longer employed by Microsoft or any other company and was not covered by a retirement plan at work, he would be able to deduct the full amount of his IRA contribution for 2017, notwithstanding his annual gross income amount.  Whereas, if Bill Gates was still employed at Microsoft and was covered by the company’s retirement plan, he would not be able to take a deduction for his IRA contribution because his income would exceed the maximum threshold amount.   Interestingly, the Internal Revenue Service (“IRS”) rules do not distinguish whether the individual that is covered by an employer retirement plan actually participated and made contributions to the plan.  The rule states, however, that so long as the employee is covered by the employer retirement plan, that individual’s AGI will determine whether he or she can take a tax deduction for the IRA contribution.  Thus, if an individual is covered by an employer sponsored retirement plan, notwithstanding whether that individual actually made a contribution to the plan, the individual’s AGI will be the determining factor whether he or she can deduct his or her IRA contribution.  An individual that does not have access to an employer 401(k) plan has no such limitation.

For 2017, if an individual is covered by a retirement plan at work, the following table provided by the IRS will help one determine what amount of his or her IRA contribution for 2017 is tax deductible.

Filing Status Your Modified AGI IRA Deduction Amount
single or
head of household

$62,000 or less
_____________

more than $62,000 but less than $72,000

_____________
$72,000 or more

A full deduction up to the amount of your 2017 contribution limit
_______________

Partial deduction
________________
No deduction

married filing jointly or qualifying widow(er)

$99,000 or less
________________

more than $99,000 but less than $119,000

________________
$119,000 or more

A full deduction up to the amount of your 2017 contribution limit
_______________
Partial deduction
________________
No deduction
married filing separately Less than $10,000
______________
$10,000 or more

Partial deduction
_______________

No deduction

Having the ability to contribute and deduct IRA contributions is an important aspect of many Americans’ retirement strategy.  In order to best take advantage of the existing IRA contribution and deduction rules available, it is vital that Americans with access to an employer retirement plan have a solid understanding of how the IRA contribution deduction rules work.

For more information, please contact us @ 800.472.1043.