IRA Contributions Tax Deductible?

by | Apr 14, 2023 | Videos

Are IRA Contributions Tax Deductible?

We are often asked, are your IRA contributions tax deductible?  Well, in this week’s video, episode #337), Tom discusses the choice (the decision) you need to make regarding whether to put money into an IRA, or not.   Tom walks through numbers you should know when it comes to whether your IRA contribution will be deductible, or not… including a specific example of a couple filing jointly with $135,000 in modified adjusted gross income (mAGI).

This video might be a little “mathy” – but Tom points out specific circumstances to help you make an important decision regarding your IRA.  Is it worth a tax deduction in one year (this year) to lock the money up until retirement?

Time Stamps for Episode 337 – Are IRA Contributions Tax Deductible?
0:36 – 25 year olds need cash!
1:30
– CPA instructions – right?
2:15
– REWARD for saving, not a REASON
3:27
– Can this single filer deduct?
4:22
– Married, filing joint deduction limits
5:04
– Specific example where adjusted gross income is $135,000

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TRANSCRIPT for Are IRA Contributions Tax Deductible:

In this video, we’re going to talk about last-minute IRA contributions, so stick around.

Welcome to the Mullooly Asset Show. I’m your host, Tom Mullooly, and this is episode 337. Thanks for tuning in.

I want to talk about making last-minute contributions to your retirement plan. Unfortunately, this is something we have to deal with every single year — and it has been every year — for my entire career.

In fact, funny story, in 1987, I had my taxes done by the same guy who did my Dad’s taxes. And he mailed them to me. It was 1987. And he included a note saying, “Make sure to put $2,000 into an IRA before April 15th.”

Well, I opened the tax envelope on April 13th! I was going to have trouble putting two grand together because, well, I was 25 years old! But down at the bottom of the sheet, where he had those instructions he wrote, “Your tax savings will be $410.”

Well, I made an executive decision at age 25 that I’ll just pay the $410 because I didn’t want to give up two grand. I actually kind of needed that money when I was 25 years old!

And so we have people, now fast-forward 30 years later, who are making the same kinds of decisions every year around April 11th, April 12th, April 13th. We still have people coming in saying, “My tax preparer said I need to put $6,500 into an IRA before April 15th.”

I want to explain something to you. Your tax preparer may NOT KNOW if you are participating in a workplace retirement plan. I mean, your tax preparer SHOULD know that, but it’s possible that they may have overlooked the fact you’re already participating in something like that.

If you are, you can’t deduct the money that you put into an IRA.

When we put money into an IRA or any kind of retirement plan, understand that there should be a reward behind doing something like that. Yes, you do get a tax break, but the money is there because you want it to compound for many years until you can enjoy it in retirement. And so putting money into a retirement account should be a reward …not a reason. And NOT because my accountant told me that I have to do it by Thursday.

So if you’re participating in a workplace retirement plan …and we’re talking about 401(k), a 403(b) annuity, if you’re a teacher, for example, a money purchase plan, a defined benefit plan, or a pension plan, even if you have a SIMPLE plan at work or a SEP IRA — these are all workplace retirement plans. And if you’re participating in them, you can still put money in an IRA.

You just can’t deduct it.

It’s important to know this deductibility thing is a really big deal. So we want to talk about where the line is for deductible versus non-deductible.

If you’re a single tax filer, you can fully deduct your $6,500 contribution in 2023 if your modified adjusted gross income is $78,000 or less. So if you have modified adjusted gross income of 78 grand, you’re just tipping over into the 22% tax bracket. The odds are you might even be in the 12% tax bracket.

When you’re putting $6,500 into a retirement account and you’re in the 12% tax bracket, you’re talking about getting about a $700 tax benefit this year, but you’re locking the money up for a very long period of time.

Is it really worth it for you to be doing something like that?

Now, if you’re married and you file jointly, you can fully deduct up to 13 grand. That’s $6,500 per person in 2023. You can do this if your modified adjusted gross income is $136,000 or less. Again, if you’re in that situation, you’re in the 10% tax bracket, the 12% tax bracket, maybe just tipping over into the 22% tax bracket. Again, not a lot of help for your taxes in these kind of situations.

So I’ll just get a little mathy here and walk through an example.

If your adjusted gross income is $135,000, and you’re married, filing jointly… you can put up to $13,000 into a deductible IRA.

The first thing I want you to think about is if your after-tax, your take-home money is $135,000, and you’re being told to put $13,000 into an IRA, that’s a lot. That’s a big chunk of your annual cash flow. That’s almost 10% of your free cash flow going into a retirement account.

You’re locking that money up for a very long period of time.

In addition to that, if you didn’t make the contribution, your taxes would be $20,934 that year.
If you do make the contribution, your taxes are just a shade over $18,000.
So you’re going to save about $2,800 in taxes.

That sounds like a lot, but does it really move the needle for you?

You’re saving some money in taxes, but you’re locking that money up until… You can’t touch it without a penalty until you’re over age 59 and a half.

It’s a big decision, and unfortunately, folks are being told by their tax preparers they have to do this by April 15th and they’re getting their taxes done on April 12th. There’s not a lot of time to make an educated decision when it comes to these things.

Again, planning properly, putting money away every month or every pay period into a retirement account makes great sense. Don’t wait until the last minute to make big decisions like this. You may regret it.

That’s the message behind episode 337. Are IRA Contributions tax deductible?  Thanks again for tuning in.

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