Ground Rules for Deductible Contributions to Traditional IRAs

Making a tax deductible contribution to a traditional IRA is an easy and quick way to lower your tax liability. But this doesn’t work for everyone. Here’s a checklist to see if you might be eligible for this last-minute strategy:

1. Have you and your spouse (if you’re married) reported sufficient “earned income” in 2015 to offset what you plan to contribute to your IRA for 2015?

2. Were you younger than 70 1/2 on December 31, 2015? If you turned 70 1/2 last year, you can’t make a deductible contribution.

3. Were you covered by an employer-sponsored retirement plan in 2015? If so, your eligibility to make a deductible contribution to a traditional IRA in 2015 is phased out at the following income levels:

• For single taxpayers who are covered by an employer-sponsored plan, it’s phased out for adjusted gross income (AGI) between $61,000 and $71,000.
• For married taxpayers who were both covered by retirement plans in 2015, it’s phased out for both spouses for joint AGI between $98,000 and $118,000. 
• For married taxpayers with only one spouse covered by a retirement plan, the covered spouse’s eligibility to make a deductible contribution for last year is phased out for joint AGI between $98,000 and $118,000. The noncovered spouse’s eligibility is phased out for joint AGI between $183,000 and $193,000.

For example, suppose you’re a 40-year-old single taxpayer in the 25% federal income tax bracket who makes a $5,500 deductible IRA contribution on April 1. If you meet all of the eligibility requirements, this move would reduce your federal income tax bill by $1,375 (plus any state income tax savings).

On the other hand, if you’re married and file jointly and both spouses were over 50 years old on December 31, 2015, you could potentially make two $6,500 contributions (for a total of $13,000). If you meet all of the eligibility requirements, these contributions would reduce your joint federal income tax bill by $3,250 if you are in the 25% bracket (plus any state income tax savings).

© 2016