Taking advantage of a retirement plan at work and an IRA is a smart way to cut taxes and save more money for the future. But having multiple accounts can change the rules. Laura answers a listener question and explains how to avoid pitfalls so you leverage multiple accounts to reach your retirement goals.
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 your workplace retirement plan is the perfect option.
Deducting Traditional IRA Contributions Without a Retirement Plan at Work
Here’s another situation that affects married people. Let’s say Justin is married to Sarah, who works for a small company that doesn’t offer a retirement plan. Because Justin is covered by a 401k, that limits how much Sarah can deduct for her IRA as well. She can max out an IRA in any year—but the amount she can deduct depends on their household income.
For 2017, if you’re not covered by a retirement plan at work, but your spouse is, the deductibility of your IRA contributions depends on these income limits for 2017:
- Married taxpayers who file a joint return get a partial deduction when household MAGI is between $186,000 and $196,000, but no deduction at or above $196,000.
- 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.
Should You Make Non-Deductible IRA Contributions?
You might be thinking, what’s the point of making contributions to a traditional IRA if they don’t come with a full tax deduction? When you make non-deductible contributions to a traditional IRA, the only benefit you get is deferring tax on growth in the account until you make withdrawals in the future. Still a good benefit.
But a downside to having a traditional IRA than contains both deductible and non-deductible contributions is that the recordkeeping gets tricky. So, if you’re not extremely organized or don’t have a tax accountant, I recommend opening a separate traditional IRA that’s just for your non-deductible contributions.
Keeping different types of contributions separate helps prevent any confusion about which funds have already been taxed and which haven’t. If you or your custodian don’t keep it straight, you could end up paying tax on the same funds for a second time in retirement.
To help with the recordkeeping, you’re required to file IRS Form 8606, Nondeductible IRAs when you make non-deductible contributions to a traditional IRA.
See also: The Rules for Using a Spousal IRA