What made the original IRA a no-brainer investment was a simple, indisputable fact: Contributions were deductible. Put $4,000 into an IRA, write off $4,000 on your tax return.
In the 25% bracket, that saves $1,000 and delivers instant gratification. But there are some restrictions to prevent some higher-income earners from getting that deduction. There are two tests that determine how much you can deduct if you save within a traditional IRA:
- Company plan test. Are you an active participant in a company retirement plan? You are, as far as the law is concerned, if you are eligible during any part of the year to participate in a pension, profit sharing, or similar plan. (If you are in a profit-sharing plan but no contribution is made to your account for the year, however, you are not considered covered for that year.) Or if you make a contribution to your 401(k) anytime during the tax year.The Form W-2 you receive from your employer should indicate to you -- and the IRS -- whether you're covered.If you are not tripped up by the company-plan test, you can deduct IRA contributions regardless of how high your income is.
- Income test. If you are covered by a plan, you may lose your right to the deduction. The write-off is phased out for active participants in company plans whose adjusted gross income(AGI) -- before subtracting IRA contributions -- exceeds certain levels. See IRS Publication 590 for more information.
You could still contribute up to the annual contribution limit to your account; it simply could not be deducted from your tax bill.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Do nondeductible contributions make sense?
Before Congress created the Roth IRA, nondeductible contributions to a regular IRA made good financial sense because -- deductible or not -- money inside an IRA grows without annual interruption from the IRS. Now, however, it would be a serious blunder for anyone who qualifies to use a Roth -- and that's almost everyone -- to make nondeductible contributions to a regular IRA.
-
Donating Complex Assets Doesn't Have to Be ComplicatedIf you're looking to donate less-conventional assets but don't know where to start, this charity executive has answers, such as considering a donor-advised fund (DAF) for its tax benefits and ease of use.
-
Travel trends you can expect this summerThe Kiplinger Letter Domestic trips will trump foreign travel amid economic uncertainties, though some costs are down.
-
Missouri Leads Capital Gains Tax Repeal: Will Your State Follow?State Tax As one state becomes a test case, policymakers and taxpayers across the U.S. will be watching closely to see what happens next.
-
Here's How the Child Tax Credit Could Increase Under TrumpTax Credits House Republicans released details on President Trump’s ‘one big, beautiful bill,’ including an increased child tax credit.
-
New Overtime Tax Deduction Proposed for Millions Working Extra HoursTax Law Some lawmakers and President Trump want to offer overtime tax relief. But will a tax deduction or an exemption help you most?
-
Big Tax Deduction Increase Proposed for Those Over Age 65Tax Deductions A new bipartisan bill and a tax plan from the House GOP could mean bigger retirement tax savings to offset taxes on Social Security and high prices.
-
New HSA Contribution Limits Are Set for 2026: What to Know NowHealth Savings The IRS says Health Savings Account contribution limits will increase again next year due to inflation.
-
Retirees: Don’t Miss These Valuable State Tax Breaks in 2025Retirement Planning Selecting the right state for retirement can significantly impact your financial well-being.
-
Trump’s Tax Cut Risks Your SNAP, Medicaid BenefitsTax Cuts The GOP budget blueprint could slash lifesaving programs for millions of U.S. households.
-
Missed Tax Day? Nearly One Million Taxpayers Still Can File and Claim Valuable Tax RefundsTax Refunds As many as one million taxpayers could be missing out on a significant tax refund.
