Why Is My Traditional IRA Contribution Not Deductible?

Saving for retirement through a Traditional IRA can provide tax benefits, but not all contributions qualify for a deduction. Many assume every dollar contributed lowers taxable income, only to realize later that isn’t always the case.

Several factors determine deductibility, including workplace retirement plan participation, income level, and tax filing status. Understanding these rules can help avoid surprises when filing taxes.

Enrollment in an Employer-Sponsored Plan

Participation in a workplace retirement plan affects whether Traditional IRA contributions are deductible. The IRS limits deductions for individuals covered by an employer-sponsored plan, such as a 401(k) or 403(b). Even if no contributions are made to the workplace plan, eligibility alone can restrict deductions.

Each year, the IRS updates income thresholds that determine how much, if any, of a Traditional IRA contribution can be deducted for those covered by a workplace plan. For 2024, a single filer with a workplace plan begins losing the deduction at a modified adjusted gross income (MAGI) of $77,000, with the deduction disappearing at $87,000. For married couples filing jointly, where the contributing spouse is covered by a workplace plan, the phase-out starts at $123,000 and ends at $143,000. These limits change annually, so checking the latest IRS guidelines is necessary.

Employers report retirement plan participation on Form W-2 in Box 13. If this box is checked, the IRS considers the person an active participant, even if no contributions were made. This designation affects IRA deduction eligibility, making it important to review W-2 forms before assuming contributions will reduce taxable income.

Household Income Above Deduction Threshold

Earning above certain income limits can reduce or eliminate the ability to deduct Traditional IRA contributions. The IRS sets annual MAGI thresholds that determine whether contributions qualify for a full, partial, or no deduction. These limits also apply if an individual is not covered by a workplace plan but has a spouse who is.

For 2024, if a married couple files jointly and one spouse is covered by an employer-sponsored plan while the other is not, the deduction begins to phase out at a combined MAGI of $230,000 and disappears at $240,000. For single filers without a workplace plan, the deduction remains fully available regardless of income. However, for those married filing separately, the phase-out range is much lower, between $0 and $10,000.

MAGI differs from taxable income because it adds back certain deductions, such as student loan interest and foreign earned income exclusions. Individuals who assume they qualify based on adjusted gross income (AGI) may find themselves over the threshold once these adjustments are factored in.

Filing Status Affecting IRA Deductions

Tax filing status influences whether a Traditional IRA contribution is deductible, particularly for married couples. While single filers follow a straightforward set of rules, married couples face additional restrictions that can limit their deduction.

For married couples filing separately, the deduction is severely restricted if either spouse is covered by a workplace retirement plan. Unlike joint filers, who experience a gradual phase-out, those filing separately lose their deduction almost immediately once income exceeds $10,000. This rule prevents high earners from using separate filings to bypass deduction restrictions. Joint filers have a much higher phase-out range, allowing more flexibility in claiming deductions.

Filing separately can also impact eligibility for other tax benefits, such as education credits, healthcare deductions, and capital loss claims. Couples considering this option should weigh the trade-offs carefully, as the loss of these benefits may outweigh any potential IRA deduction. Tax software and professional advisors can help determine whether filing jointly or separately results in a lower overall tax liability.

Excess Contributions Beyond Allowed Limits

Exceeding the annual contribution limit for a Traditional IRA can result in tax penalties. For 2024, the maximum contribution is $7,000 for individuals under 50, while those 50 and older can contribute up to $8,000 due to the catch-up provision. Contributions beyond these limits are subject to a 6% excise tax for each year the excess remains in the account.

The IRS allows excess contributions to be corrected before penalties accumulate. If the overage, along with any earnings attributable to it, is withdrawn before the tax filing deadline (including extensions), the excise tax can be avoided. However, if the excess remains in the IRA past this deadline, the 6% penalty is assessed annually until corrected. Earnings on excess contributions must also be included in taxable income for the year of withdrawal, potentially leading to additional tax liabilities.

Missing Required Documentation

Failing to provide the necessary documentation when making a Traditional IRA contribution can lead to issues with deductibility. The IRS requires accurate reporting, and missing or incorrect paperwork can result in a denied deduction or penalties.

Form 5498, issued by IRA custodians, reports contributions made during the tax year. While this form is not filed with a tax return, it serves as an official record. Discrepancies between what the taxpayer reports and what the custodian submits to the IRS can trigger an audit or adjustment.

Contributions must be made within the allowable timeframe, which extends until the tax filing deadline, typically April 15 of the following year. Contributions made after this date cannot be applied to the prior tax year.

For rollovers or conversions, additional forms such as Form 8606 may be required to track nondeductible contributions. This form is essential for individuals who contribute to a Traditional IRA but do not qualify for a deduction, as it prevents future double taxation when withdrawals are made. Keeping detailed records of all IRA transactions, including contribution confirmations, bank statements, and tax forms, helps ensure compliance and prevents issues when claiming deductions.