Can I Deduct My IRA Contribution If I Can Participate in a 401(k)?

by Dale Bye, Demand Media
    By contributing fully to your 401(k), you increase your opportunity to deduct a traditional IRA contribution.

    By contributing fully to your 401(k), you increase your opportunity to deduct a traditional IRA contribution.

    If you're young, single and living in Mom and Dad's basement, use it to your advantage. Now's the time to load up on your retirement account contributions. Depending on your income, you can make a full pretax contribution to your company's 401(k) plan and still grab another deduction with a full IRA contribution.

    Contribution Limits

    The IRS sets IRA contribution limits annually. For 2012, those limits were $5,000, plus an additional $1,000 if you're at least 50. You're not allowed to contribute to an IRA beginning the year you turn 70 1/2.

    Full Deduction

    If you have a pension plan at work – a 401(k), 403(b) or similar plan – you must meet IRS income restrictions, even if you don't participate in the workplace plan, before you can fully deduct your contribution to a traditional IRA. The IRS can change the income limits each year. Using 2012 limits, deduct your IRA contribution if you're single and your modified adjusted gross income is less than $58,000. If you're married and file jointly, the full deduction stops when your income hits $92,000. But if you're part of an unmarried couple, your "joint" income can stretch up to $116,000 before you lose out on the full deduction.

    Gift of the MAGI

    Remember, 401(k) or other qualified employer-sponsored plan contributions don't count as part of your modified adjusted gross income, or MAGI. So, let's say you're single and your gross pay is $84,500. If you contribute the maximum allowable $17,000 to your company's 401(k), even with no other exemptions or deductions, your MAGI drops to $57,500 and below the IRA-deduction limit.

    Partial Deduction

    Within certain income ranges, you can deduct part of your IRA contribution. For single persons, the partial deduction range falls between $58,000 and $68,000. For joint filers, it's $92,000 to $112,000. Figuring the proportionate amount is fairly easy. For example, if your MAGI is $61,523, subtract the amount over $58,000 – $3,523 – from $10,000. From the difference – $6,477 – count over two places and drop in a decimal point: You can deduct 64.77 percent of your contribution. If you're married, subtract the amount over from $20,000, then divide it by 2 before counting over and dropping in the decimal point for your percentage deduction.

    Spouse Deductible Contribution

    If your spouse is not covered by a pension plan – even if you are – he can make tax-deductible contributions if your joint MAGI is less than $173,000. That deductible phases out at $183,000. Your spouse does not need earned income for the contribution.

    Married Filing Separately

    Married persons who live together but file separately can fully deduct IRA contributions only if their MAGI is $0, but you can deduct a proportionate portion of your IRA contributions up to a MAGI of $10,000.

    Rollover IRA

    If you roll over a tax-qualified workplace retirement from a previous employer into a traditional IRA, the IRS does not allow you to treat it as a contribution, so you can't deduct any of the rollover on your taxes.

    About the Author

    Dale Bye has spent more than 40 years in journalism, including 25 supervising reporters and editors at metropolitan newspapers and eight years as senior managing editor at a national sports magazine. He directed five newspaper-sponsored personal finance fairs. His fields of expertise include business and personal finance, sports, fitness and theater. Bye holds a Bachelor of Journalism from the University of Missouri.

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