Eligible IRA Tax Deductions

If you didn’t get around to contributing to an IRA in 2023 and you’re looking for ways to lower your tax bill, you may still have an option. Qualified taxpayers can make deductible contributions to traditional IRAs until the tax filing date of April 15, 2024, and claim the benefit on their 2023 returns.

Who is eligible?

You can make a deductible contribution to a traditional IRA if:

• You (and your spouse) aren’t active participants in an employer-sponsored retirement plan, or

• You (or your spouse) are active participants in an employer plan, but your modified adjusted gross income (MAGI) doesn’t exceed certain levels that vary from year to year by filing status.

For 2023, joint tax return filers who are covered by an employer plan have a deductible IRA contribution phaseout range of $116,00 to $136,000 of MAGI. For taxpayers who are single or a head of household, the phaseout range is $66,000 to $76,000. For married filing separately, the phase-out range is $0 to $10,000. For 2023, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, the deductible IRA contribution phase-out range is $218,000 to $228,000 of MAGI.

Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax-deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59½, unless an exception applies).

IRAs are often referred to as “traditional” IRAs to distinguish them from “Roth” IRAs. You also have until April 18 to make a Roth IRA contribution, though, unlike traditional IRA contributions, Roth IRA contributions aren’t deductible. Withdrawals from a Roth IRA are tax-free if the account has been open for at least five years and you’re age 59½ or older. (Contributions to a Roth IRA are subject to income limits.)

What’s the contribution limit?

For 2023, if you’re eligible, you can make deductible traditional IRA contributions of up to $6,500. If you were age 50 or older on Dec. 31, 2023, you also may be eligible to make a “catch-up” contribution of up to $1,000.

Alternatively, small business owners can set up and contribute to a Simplified Employee Pension (SEP) IRA up until the due date for their returns, including extensions. For 2023, the maximum SEP contribution is $66,000.

2 alternate IRA strategies:

Here are a couple of other ways you may be able to save tax with an IRA:

1. Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2023? That’s helpful in the future when you take tax-free payouts from the account, but the contribution isn’t deductible. If a deduction is important now, you can convert a Roth IRA contribution into a traditional IRA contribution using a “recharacterization” mechanism. Assuming you meet the requirements, you may then take a traditional IRA deduction.

2. Make a deductible IRA contribution, even if you don’t work. Generally, you must have wages or other earned income to make a deductible traditional IRA contribution. An exception applies if your spouse is the breadwinner and you’re a homemaker. If so, you may be able to take advantage of a spousal IRA.

For more information about how IRAs or SEPs can help you save the maximum tax-advantaged amount for retirement, contact us.