Can I Deduct My IRA Contributions When I Have a Pension Plan?
Original post by Mark Kennan of Demand Media
Having a pension plan through your employer offers many advantages, but it may limit your ability to deduct your contributions to your traditional IRA account. Before you make your annual contribution, you should review how the pension plan affects you contributions so that you can decide if a traditional IRA contribution is in your best interest or if another option is better suited to your needs.
Pension Plan Coverage
If you are unsure, you can check if you are covered under a retirement plan at work by looking on your Form W-2. If you are covered, the "Retirement Plan" box in box 13 will be checked. Examples of employer-sponsored retirement plans include, but are not limited to SEP IRAs, SIMPLE IRAs, 401k plans and 403b plans. If you are covered by only Social Security or railroad retirement, you are not considered to have an employer pension. Remember, you do not have to actually contribute to the pension plan, you just need to be eligible to participate.
Modified Adjusted Gross Income Limits
The modified adjusted gross income limits change on an annual basis to keep pace with inflation. As of 2011, you can deduct your entire traditional IRA contribution if you are single and have a modified adjusted gross income under $56,000, or if you are married filing jointly with a modified adjusted gross income of under $89,000. For singles with a modified adjusted gross incomes between $56,000 and $66,000, you can only deduct a portion of your traditional IRA contribution. The same rule applies to married couples filing jointly with a modified adjusted gross income between $89,000 and $109,000 and married couples filing separately with a modified adjusted gross income between $0 and $10,000. If your modified AGI is above those amounts you cannot deduct any portion of your contribution.
Figuring Your Modified Adjusted Gross Income
Your modified adjusted gross income for the purposes of calculating the deductibility of your traditional IRA contribution is actually a variation on your adjusted gross income. From your adjusted gross income, add the value of any deductions taken for traditional IRA contributions, student loan interest, tuition and fees, domestic production activities and foreign housing. Also add back any exclusions for foreign income, savings bond interest and employer-paid adoption benefits.
Alternatives to Deductible IRA Contributions
In the event that you cannot deduct your traditional IRA contribution, you can make a contribution to a Roth IRA instead, if your modified adjusted gross income is low enough. The modified adjusted gross limits for Roth IRAs are significantly higher, except if you file as married filing separately. Though you cannot deduct your contribution, you can take qualified withdrawals of both the money you put in and your investment returns tax-free. If you cannot contribute to a Roth IRA, you can make a nondeductible contribution to your traditional IRA. When you do so, the nondeductible contributions come out tax free, but you will pay income taxes on the earnings.
- Internal Revenue Service: Publication 590
- Internal Revenue Service: Effect of Modified AGI on Deduction if You Are NOT Covered by a Retirement Plan at Work
- Internal Revenue Service: Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work
About the Author
Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.
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