Deductions for Contributions to Traditional IRAs
Non-active Participants
Contributions to traditional IRAs are fully deductible up to the current year's contribution limit when neither the taxpayer nor his or her spouse is an active participant in an employer's qualified retirement plan.
Active Participants
If the taxpayer is an active participant in a qualified retirement plan, then the contribution may be fully or partially deductible, depending on the taxpayer's marital status and individual or joint adjusted gross income (AGI) level.
The IRS says an active participant is a person covered by a plan for a tax year. A person is considered covered by a defined contribution plan (money purchase pension, profit sharing, 40l(k) plans, stock bonus plans, SEPs, SIMPLE and 403(b) plans) if amounts are contributed to or allocated to the person's account for the tax year, or if the person is eligible for the allocation (e.g., 401(k) deferral eligibility).
A person is considered covered by a defined benefit plan if the person meets the minimum age and service requirements within the tax year. The defined benefit plan active-participation rules apply even if the person declined to participate, did not make a required contribution, or did not perform the minimum service required to accrue a benefit.
When the taxpayer is an active participant in an employer retirement plan, the IRA deduction is reduced by $0.40 for each dollar of adjusted gross income (AGI) over $85,000 for married taxpayers filing jointly, and is lost completely when their joint AGI reaches $105,000 (for 2008). For an unmarried taxpayer participating in an employer retirement plan, the 2008 AGI range is $53,000 to $63,000. The deduction is rounded up to the next lowest multiple of $10 (if it isn't already a multiple of 10 after making the calculation). However, there is always a $200 minimum deduction when AGI falls within the specified range. Thus, a single taxpayer with a 2008 AGI of $62,975 could still take a $200 IRA deduction.
The following table shows the AGI levels at which the IRA deduction is phased out for single taxpayers (assuming they are active participants in an employer plan) in various years:
Single Taxpayers Phaseout Range |
| | |
2002 | $34,000 | $44,000 |
2003 | $40,000 | $50,000 |
2004 | $45,000 | $55,000 |
2005 | $50,000 | $60,000 |
2006 | $50,000 | $60,000 |
2007 | $52,000 | $62,000 |
2008 | $53,000 | $63,000 |
| | |
The following table shows the AGI levels at which the IRA deduction is phased out for married taxpayers filing jointly in various years:
Married Filing Jointly Phaseout Range |
| | |
2002 | $54,000 | $64,000 |
2003 | $60,000 | $70,000 |
2004 | $65,000 | $75,000 |
2005 | $70,000 | $80,000 |
2006 | $75,000 | $85,000 |
2007 | $83,000 | $103,000 |
2008 | $85,000 | $105,000 |
| | |
For married persons filing separately, the phase-out range is zero to $10,000. The applicable beginning dollar limits in the phaseout ranges listed above are inflation-indexed beginning in 2008, with any increase being rounded to the nearest multiple of $1,000.
A non-participating spouse whose spouse is an active participant can take a full deduction for an IRA contribution based on his or her own earnings if joint return AGI equals $159,000 or less. The deduction is reduced gradually for AGI between $159,000 and $169,000, and is lost completely when AGI exceeds $169,000.
Catch-up Contributions for Certain Individuals
For taxable years 2007-2009, an "applicable individual" is entitled to make a deductible IRA contribution equal to three times the otherwise applicable IRA deduction limit. An applicable individual making this limited catch-up contribution cannot also take advantage of the age 50 or older catch-up contribution rule. To be an "applicable individual," the person must have been a participant in a 401(k) plan in which the employer matched at least 50% of the salary deferral contributions made by the employee with employer stock. The person must also have been a participant in the 401(k) plan at least six months before the bankruptcy case was filed. The employer sponsoring the 401(k) plan must have been debtor in bankruptcy for the year preceding the year in which the applicable individual makes the additional contribution and must have been subject to an indictment or conviction resulting from business transactions related to the bankruptcy case.
State Law Conformity Problems
States may also allow deductions for IRA contributions, often adopting the federal rules regarding eligibility and amount of contribution. Some states, however, specify a fixed dollar amount in their statutes as the maximum contribution. Thus, if a particular state has a statutory maximum of $2,000, and has not acted to conform state law to the federal contribution limit, an IRA owner could not take advantage of the higher federal contribution limit without making an excess contribution for state law purposes.