Traditional individual retirement accounts, or IRAs, are tax-deferred, meaning that you don’t have to pay tax on any interest or other gains the account earns until you withdraw the money. The contributions you make to the account may entitle you to a tax deduction each year. However, the Internal Revenue Service (IRS) restricts who can claim a tax deduction for contributions to traditional IRAs based on various factors.
TurboTax Premier makes it easy and fast to import, upload, and accurately report your investments, effortlessly. You can auto import over 3500 transactions easily, whether from stocks, crypto, ESPPs, robo-investing, and more. Start for free and get up to an additional $15 off when you file with TurboTax Premier.
Are you eligible for a tax deduction?
Everyone is eligible to make contributions to a traditional IRA, but a tax deduction for those contributions may not always be available. You may need to reduce or entirely eliminate your IRA deduction if you or your spouse
- contributes to an employer-sponsored retirement plan, such as a 401(k) or 403(b), and
- your Modified Adjusted Gross Income (MAGI) exceeds annual limits.
If you and your spouse are not eligible to contribute to an employer plan, you can deduct your contribution as long as you earn income during the year. For purposes of the IRA deduction, earned income excludes interest, dividends, and similar types of investment income.
Income and tax deduction limitations
The IRS limits the amount you can deduct each year, and this amount is subject to change each tax year. This maximum tax deduction may also be subject to a reduction when your MAGI is too high. The IRS provides a worksheet with your tax return instructions to help you calculate your deduction.
Our TurboTax Live experts look out for you. Expert help your way: get help as you go, or hand your taxes off. You can talk live to tax experts online for unlimited answers and advice OR, have a dedicated tax expert do your taxes for you, so you can be confident in your tax return. Enjoy up to an additional $20 off when you get started with TurboTax Live.
If you use tax software, such as TurboTax, you can avoid tedious calculations and let your computer calculate the deduction for you. TurboTax can help you determine whether your IRA contributions are deductible and will calculate exactly how much you can deduct.
Reporting your IRA deduction
The IRS categorizes the IRA deduction as an above-the-line deduction, meaning you can take it regardless of whether you itemize or claim the standard deduction. This deduction reduces your taxable income for the year, which ultimately reduces the amount of income tax you pay.
Alternatives to traditional IRAs
If you cannot make a tax-deductible contribution to a traditional IRA, consider these alternatives.
- First, maximize your contributions to the retirement plans that your employer offers. Contributions to 401(k) plans and 403(b) plans have the same effect on your taxes as a contribution to a traditional IRA.
- Second, if your MAGI does not exceed the IRS limits for contributing to a Roth IRA, consider putting the money into this type of account instead of a traditional IRA.
Whether you have stock, bonds, ETFs, cryptocurrency, rental property income, or other investments, TurboTax Premier has you covered. Filers can easily import up to 10,000 stock transactions from hundreds of Financial Institutions and up to 4,000 crypto transactions from the top crypto exchanges. Increase your tax knowledge and understanding all while doing your taxes.