- As of early 2011, the general limit on deductible contributions to traditional Individual Retirement Arrangements is $5,000. Workers 50 and over can contribute an extra $1,000 on a tax-deductible basis. Provided the worker meets income qualifications, he can also make an equal tax deductible contribution for a non-working spouse. Contributions grow tax deferred until they are withdrawn, at which time the IRS taxes the withdrawals as ordinary income. Withdrawals made prior to age 59 1/2 incur a 10 percent penalty unless certain conditions apply, such as hardship, disability, or if the withdrawals are made to pay a down payment of up to 10 percent on your first home, or pay college expenses for yourself or a dependent.
- For those who are covered by a workplace retirement plan, including a 401k, 403b or traditional pension plan and single, you can deduct the full $5,000 contribution provided you earn less than $56,000 in modified adjusted gross income per year. If you make more than that limit, your ability to deduct contributions is phased out gradually until your modified adjusted gross income reaches $66,000 per year. After that point, you cannot make deductible contributions to an IRA.
- For married taxpayers covered by a retirement plan at work, you may take the full $5,000 deduction on your contributions provided your modified adjusted gross income is $90,000 or less, and you file a joint return with your spouse. Your ability to deduct contributions is phased out gradually when your income reaches above $90,000, and is phased out completely when your income reaches $110,000. You may still make nondeductible contributions to the IRA, however.
- If you are filing separately from your spouse, you can take a partial deduction if your modified adjusted gross income is $10,000 or less. If you earned more than that amount, you cannot make a deductible traditional IRA contribution, but you can still contribute on a nondeductible basis.
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