Whether you have access to a workplace retirement account or not, anyone with earned income can contribute to their own IRA. However, depending on your income, employment status, and the type of IRA you choose, your contributions may or may not be tax deductible. There are several types of IRAs available and it is important to know if IRA contributions are tax deductible. A financial adviser may also be able to answer some of these questions. Consider using SmartAsset’s free advisor matching tool today to find advisors who serve your area.
What is an IRA?
IRA stands for Individual Retirement Account. The money you put in an IRA grows tax-free throughout your lifetime. In exchange, you cannot access funds until retirement age of 59 1/2, except in certain circumstances.
Saving for retirement in an IRA is attractive to most investors because of the following benefits:
- Easy to configure. Setting up an IRA is quick and easy. Many investment companies allow you to set up your account online or through a mobile app in minutes.
- Access to a wide variety of investments. While company retirement plans limit contributions to a handful of choices, IRAs offer many more investment options. You can invest in stocks, bonds, mutual funds, ETFs and a variety of alternative assets.
- Unemployed spouses can also contribute. If your spouse earned income, you don’t need to be employed to contribute to an IRA. This benefit ensures that everyone can save for their retirement needs.
- No tax on annual gains. As long as the money stays in your IRA, it will continue to grow tax-free. Depending on the type of IRA you have selected, withdrawals may be tax-free or taxed as ordinary income.
Due to the valuable tax benefits of an IRA, there are limits to how much you can contribute each year. This limit is now indexed to inflation, and the IRS updates contribution limits every few years. In 2022, you can contribute up to $6,000 to your IRA. For investors age 50 and over, you can contribute an additional $1,000 as a “catch-up” reserve.
Are IRA contributions tax deductible?
There are three main types of IRAs to choose from, the traditional IRA, the Roth IRA, and the non-deductible IRA. Each has specific benefits and characteristics that make them ideal for different types of investors. Your choice and eligibility to contribute depends on your income, tax status and the availability of a workplace retirement account. The income limits shown in the tables below are indexed to inflation. It’s wise to compare the limits each year with your income and tax status. The results will determine whether or not you are eligible to contribute and deduct your contributions.
A traditional IRA receives contributions on a pre-tax basis and withdrawals are taxable. The ability to deduct contributions is based on income, access to a company-sponsored pension plan, and tax status. In other words, if you can contribute to a 401(k), 403(b), or other company plan, you may not be able to deduct your IRA contributions if you earn too much. ‘money. On the other hand, if you are not covered by an occupational pension plan (such as a 401(k), 403(b) or 457 plan), you can contribute up to the maximum contribution and deduct the full amount from your taxes. . Finally, for spouses filing separately, the income limits are the same whether you or your spouse have access to a workplace retirement account.
Traditional IRA Deductions for 2022 – Single, Head of Household, Married, Separate Filer If your filing status is… And your modified AGI is… Then you can take… Single or Head of Household $68,000 or less Full deduction up to amount contribution limit Single or head of household More than $68,000 but less than $78,000 Partial deduction Single or head of household $78,000 or more No deduction Married filing separately Less than $10,000 Partial deduction Married filing separately $10,000 or more No deduction Married filing jointly
If both spouses are not covered by a workplace pension plan, both can contribute up to the maximum amount and deduct it from their taxes when filing jointly. However, if one or both spouses have access to a workplace pension plan, their income will determine whether or not they can deduct these contributions. Follow the table below to guide you.
Traditional IRA Deductions for 2022 – Married Jointly Filing or Eligible Widowed If Your Filing Status Is…And Both Spouses Have Workplace Plans…Or One Spouse Has a Workplace Plan … Then you can take… Married jointly filing or eligible widow(er) $109,000 or less $204,000 or less Full deduction up to contribution limit amount Married jointly filing or eligible widow(er) Over 109 $000 but less than $129,000 More than $204,000 but less than $214,000 Partial deduction Married jointly filing or qualifying widow(ies) $129,000 or more $214,000 or more No Roth IRA deduction
Roth IRA contributions are made after tax. However, when you withdraw the money in retirement, all withdrawals are tax-free. With uncertain changes in tax laws, many investors choose the Roth IRA because they expect tax rates to rise in the future.
Your eligibility to contribute to a Roth IRA depends on your modified adjusted gross income (MAGI) and filing status. If you exceed a certain level, your ability to contribute begins to fade. For example, as a single filer, you can contribute the most to your Roth IRA if you earn less than $129,000. Once your MAGI reaches $144,000, you can no longer contribute.
Roth IRA Deductions – Single Filers 2022 (Amended AGI) Joint Joint Deposit (Amended AGI) Maximum contribution if under age 50 Maximum contribution if age 50 or over Under $129,000 Under $204,000 $6,000 $7,000 Over $129,000 but less than $144,000 More than $204,000 but less than $214,000 A reduced amount A reduced amount $144,000 and over $204,000 and over $0 $0 Non-deductible IRA
A non-deductible IRA is a traditional IRA that is not tax deductible. Investments in a non-deductible IRA benefit from tax-deferred growth. At retirement age, you can withdraw your contributions without paying tax on them.
However, investment gains from this account are taxed as ordinary income. For this reason, it may be preferable for investors to invest in a taxable brokerage account to benefit from capital gains tax rates when selling assets. Additionally, taxable brokerage accounts allow for an increase in assets passed on to beneficiaries upon your death.
The main reason an investor can contribute to a non-deductible IRA is the ability to convert the account to a Roth IRA. This process is known as a “Roth IRA backdoor” and allows the investor to contribute to a Roth IRA when their earnings are too high.
IRAs are a valuable tool for investors to save for retirement. All contributions accrue tax-free until retirement age. However, there are annual contribution limits, which can be reduced depending on your income, tax status, and access to a workplace retirement account. There’s still time to open your IRA before you file your taxes for this year. Contact your financial advisor to open your account or to find out how much you can contribute.
Tips for saving for retirement
- Figuring out which accounts to use for your retirement nest egg can be a challenge. Working with a financial advisor can make the selection easier based on their expertise and understanding of your goals. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
- Saving for retirement is one of the primary financial goals of most investors. However, how much you need to save for retirement depends on where you want to live, when you want to retire, and how much income you will need to support yourself. Our retirement calculator projects your retirement income based on your age, location, assets, income and expenses.
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Post-2022 tax deductions for traditional Roth IRAs appeared first on the SmartAsset blog.