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Would you like to both boost your retirement savings and cut your tax bill for 2018? One way is to make additional contributions to a traditional Individual Retirement Account (IRA). Contributions made by the April due date generally can be designated for 2018. That means you may be able to deduct some, or all, of the contributions from your taxable income.
Of course, your contributions need to comply with the regulations governing IRAs. For 2018, you can contribute up to $5,500 to an IRA, or $6,500 if you were age 50 or older by the end of the year. Your allowable contribution is further limited to the lesser of your earned income and the otherwise permitted amount. Thus, an unmarried 50-year-old with $3,000 of earned income is limited to a $3,000 contribution. The $6,500 limit would apply once her earned income reached that level. If you have more than one IRA, these limits apply in aggregate to all contributions to traditional IRAs, though you can allocate among the IRAs as you decide. For example, the $3,000 contribution referenced earlier could be deposited as $1,000 into three different accounts.
The ability to deduct contributions from your taxable income may be limited after your income exceeds certain levels, if you or your spouse is covered by a workplace retirement plan. For 2018, if you’re married filing jointly and your spouse is covered by a plan at work, your ability to deduct IRA contributions begins to phase out once your adjusted gross income (AGI) reaches $189,000. It’s eliminated at $199,000. What if you’re the one covered by a workplace retirement plan? If you’re married and filing jointly, your deduction begins to drop if your modified AGI tops $101,000 for 2018. It’s eliminated after your income equals or exceeds $121,000.
If neither you nor your spouse has coverage through a workplace retirement plan, you can take a full deduction, up to your contribution limit. This is true regardless of your income level.
A special provision may help
In some cases, the Kay Bailey Hutchison Spousal IRA provision may apply. Normally, if you file a joint return and your taxable compensation is less than your spouse’s — including spouses with no taxable compensation — you can contribute to an IRA, up to the smaller of:
1. $5,500 ($6,500 if you’re age 50 or older), or
2. The total compensation included in your and your spouse’s gross income, reduced by your spouse’s IRA contribution to a traditional IRA and any contributions to a Roth IRA on behalf of your spouse.
But when deducting contributions to spousal IRAs, another calculation is used. The deduction for the spouse with a lower income is the lesser of:
1. $5,500 ($6,500 if he or she is 50 or older), or
2. The total compensation of both spouses included in gross income, reduced by three amounts: the IRA yearly deduction for the spouse with the greater compensation; any designated nondeductible contribution for the year made on behalf of the spouse with greater compensation; and any contribution for the year to a Roth IRA made on behalf of the spouse with greater compensation.
Deadlines and reporting are key
You typically can contribute to your IRA right up to the filing deadline, not including extensions. But if you plan to designate a contribution you make in one year for the previous year, you need to let the plan sponsor know. Otherwise, the sponsor might assume your contribution is for the current year.
Also note that you can file your return and claim a traditional IRA contribution before you actually make it.