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Are you eligible for an IRA discount? It depends.

Many retirement savers can receive a tax deduction on the funds they contribute to a traditional IRA account annually. This depends on meeting certain qualifying rules such as having a workplace retirement account and the amount contributed to the IRA. You must have earned income, and some types of IRAs are not eligible. The Internal Revenue Service (IRS) sets a limit on the total amount of contributions that can be tax-deductible each year.

What are the qualifying types of IRAs?

You can claim a deduction for traditional IRA contributions, but not for Roth IRA contributions. Roth accounts are treated differently for tax purposes. Withdrawals from Roth accounts are tax-free in retirement since you do not receive a tax advantage on the funds at the time you contribute.

The Basics of IRA Deductions

You must have earned income from employment or self-employment to contribute to an IRA. Interest and profits from property like rents do not count as income. You and your spouse can claim an IRA deduction regardless of the amount of your income. There are no income limits, but your IRA deduction is subject to income limits if you or your spouse are also participants in an employer-sponsored retirement plan.

Annual IRA Contribution Limits

You can receive an IRA deduction of up to $6,000 for the tax year 2022 if you are under age 49. This amount increases to $7,000 if you are age 50 or older. The limit is $6,500 for the tax year 2023, and $7,500 for those over age 50.

IRA Contributions for a Non-Working Spouse

You can make a contribution for your non-working spouse if you have enough earned income to cover those contributions in addition to your own. And yes, you can claim an IRA deduction for that.

If You Have an Employer-Sponsored Retirement Plan

Your IRA deduction may be limited if you are also contributing to a company-sponsored retirement plan. This depends on the amount and type of income you are reporting.

How to Claim the Deduction

An IRA deduction is considered an “above-the-line” adjustment to income. This means you don’t have to itemize your tax deductions to claim it. You can take this deduction and also itemize deductions, or you can take it and claim the standard deduction.

Non-Deductible IRA Contributions

You can still make contributions even if you are not eligible for an IRA deduction. This type of contribution is known as a “non-deductible IRA contribution.” The money in the account will grow tax-free until distribution occurs.

Frequently Asked Questions

What is the minimum deductible contribution for an IRA?

How do you report an excess IRA contribution?

Thank you for providing your feedback!

Sources:

IRS. “IRA Deduction Limits.”

IRS. “Topic No. 451 Individual Retirement Arrangements (IRAs).”

IRS. “IRA Year-End Reminders.”

IRS. “Retirement Topics – IRA Contribution Limits.”

IRS. “2023 IRA Deduction Limits—Effect of Modified AGI on Deduction If You Are Covered by a Retirement Plan at Work.”

IRS. “2023 IRA Deduction Limits—Effect of Modified AGI If You Are NOT Covered by a Retirement Plan at Work.”

IRS. “IRS Announces Changes to Retirement Plans for 2022.”

IRS. “What If I Withdraw Money From My IRA?”

Source: https://www.thebalancemoney.com/are-you-eligible-for-the-ira-deduction-it-depends-2388981

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