Know IRA Tax Deduction Limits

Jim Blankenship writes: Your retirement savings ride on your tax-filing status. Here’s what to know this year how much you can kick in to your individual retirement accounts.

You probably use one of the following filing statuses when you ready your federal return for the Internal Revenue Service: single or head of household; married filing separately or married filing jointly.

Statuses’ limits for contributing to your IRA differ. For 2013 and 2014, though, the maximum you can contribute to all of your traditional and Roth IRAs is the smaller of $5,500 ($6,500 if you’re age 50 or older) or your taxable compensation for the year.

Deductibility of contributions also frequently depends on whether you, your spouse or both participate in a retirement plan at work or elsewhere.

Filing single or head of household:

Traditional IRA.  If you’re not covered by a retirement plan at your job, you have no modified adjusted gross income (MAGI) limitation on your deductible contributions. For 2014, if covered by a retirement plan at work you face no limitation on your deductible contributions to a traditional IRA if your MAGI is $60,000 or less.

(Online tools exist for calculating your MAGI.)

If covered by an employment plan and your MAGI falls between $60,000 and $70,000, you are entitled to a partial deduction reduced by 55% for every dollar over the lower limit.

(As in all cases here, if that partial deduction works out to less than $200, you can contribute at least $200 to your account. Contributions grow tax-free. All partial deductions reduced here by 55% also jump to a 65% reduction if you’re over 50; round all amounts after reduction up to the nearest $10.)

When covered by a plan at work and with a MAGI more than $70,000, you can’t deduct your traditional IRA contributions.

Roth IRA. If your MAGI falls below $114,000, you can kick in the entire limit to a Roth IRA. If your MAGI is $114,000 to $129,000, your allowable contribution to a Roth IRA drops ratably by every dollar above the lower end of the range. You cannot contribute to a Roth if your MAGI hits $129,000 or more.

Married filing jointly or qualifying widow(er):

Traditional IRA. If you are not covered by a retirement plan at your job and your spouse is also not covered by a plan, no MAGI limitation applies to your deductible contributions.

Similarly, if you are covered by a work retirement plan and your MAGI comes in at $96,000 or less, no limitation on your deductible contributions to a traditional IRA applies. A MAGI between $96,000 and $116,000 gets you a partial deduction reduced by 27.5% for every dollar over the lower limit, 32.5% if you’re over 50.

If you are covered by a retirement plan at your job and your MAGI exceeds $116,000, you can deduct no traditional IRA contributions.

Suppose you are not covered by a retirement plan at your job and your spouse is? A MAGI less than $181,000 allows to you deduct all of your IRA contributions. If your MAGI runs $181,000 to $191,000, you get a deduction reduced by 55% for every dollar over the lower limit.

If your MAGI exceeds $191,000, you can deduct none of your contributions to your traditional IRA.

Roth IRA. You can contribute the entire limit if your MAGI comes in under $181,000. If your MAGI is $181,000 to $191,000, your contribution declines ratably by every dollar above the lower end of the range. If your MAGI tops $191,000, you can’t contribute to a Roth IRA.

Married filing separately:

Traditional IRA. If you aren’t covered by a retirement plan on the job and your spouse is also not covered by a plan, your deductible contributions face no MAGI limitation. If you are covered by a plan at your job and your MAGI is less than $10,000, you take a deduction reduced by 55% for every dollar.

If your MAGI in this case exceeds $10,000, you can deduct none of your contributions.

If you are not covered by a retirement plan but your spouse is and your MAGI is less than $10,000, you take a deduction reduced by 55% for every dollar over the lower limit. You may deduct no contributions if your MAGI tops $10,000.

Roth IRA. If your MAGI is less than $10,000, your contribution reduces ratably by every dollar. Again, a MAGI of $10,000 or more means you can’t contribute to a Roth IRA.

For IRA MAGI qualification, a person filing as married filing separately who did not live with his or her spouse during the tax year is considered single for filing.

Where to read Jim Blankenship: Jim Blankenship, CFP, EA, is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is the author of An IRA Owner’s Manual and A Social Security Owner’s Manual. His blog is Getting Your Financial Ducks In A Row, where he writes regularly about taxes, retirement savings and Social Security.