Taking advantage of more than one retirement account in the same year allows you to cut taxes and save more money for the future. But in some cases, having an extra retirement account changes the rules and the tax benefits you receive.
I was recently asked by a client “I already maxed out my 401(k) for 2017 and after receiving a small inheritance, i now have more money to invest for retirement. Can I also max out on IRA- and if so, would the contribution also be tax-deductible?”
This is a common question that comes with a slightly complicated answer that I’ll unpack in this post. The good news is that you can always max out a retirement plan at work (like a 401(k), 403(b) or 457 plan) and still max out an IRA for the same tax year.
For 2017, workplace plans allow you to contribute up to $18,000 (under 50) or up to $24,000 (over 50). If you met those limits and still have cash to spar, socking even more into an IRA is a wise move.
The IRA contribution limits for 2017 are $5,500 for either a traditional IRA, a Roth IRA or a combination of both. And if you’re over 50, you can contribute an additional $1,000 (total of $6,500 each year). There are no income limits that prevent you from making contributions to a traditional IRA.
But there’s a tax issue that can trip you up if you are not aware of it. The bad news is that if you, or a spouse, participate in a retirement plan at work (no matter how much you contribute), the tax deduction for traditional IRA contributions may be reduced or eliminated, depending on your income.
What are Deductible and Non-deductible Retirement Account Contributions?
A traditional retirement account, like a regular 401(k) or a traditional IRA, you make pre-tax contributions from your paycheck, or you claim them as a deduction on your tax return. These deductible contributions reduce your taxable income and therefore cut the amount of tax you must pay in the year you make them.
A Roth retirement account, such as a Roth 401(k) or Roth IRA, are always non-deductible because you fund them on an after-tax basis. In other words, you pay tax upfront on Roth contributions and don’t get to claim them as a deduction on your tax return.
Because Roth IRA contributions are not deductible, there’s never a conflict with having one in addition to a workplace account. They complement a retirement plan at work very well.
Problem is, there’s a catch with a Roth IRA for high earners. If you make over a certain amount of income, you’re not allowed to make Roth IRA contributions that year.
Deducting Traditional IRA Contributions with a Retirement Plan at Work
Getting back to the question, the deductibility of contributions to a traditional IRA, when you also have a workplace plan, depend on these modified adjusted gross income(MAGI) limits of 2017.
- Single taxpayers get a partial deduction when MAGI is between $62,000 and $72,000, but no deduction at or above $72,000.
- Married taxpayers who file a joint return get a partial deduction when household MAGI is between $99,000 and $119,000, but no deduction at or above $119,000.
- Married taxpayers who file separate returns get a partial deduction when MAGI is less than $10,000 and no deduction at or above $10,000.
So, to answer the question, if your income is below these thresholds and you want an additional tax deduction for the year, then contributing to a traditional IRA, in addition to you workplace retirement plan, is a perfect option.