Hi, I’m Amy Novakovich, of Nova Wealth Management and I want to talk today about can I contribute to a traditional IRA? Or am I limited by my income, like a Roth IRA? That’s a totally different video. But your income can determine if you can even do a Roth IRA or not. In the traditional IRA arena, we have a bit more of a complicated answer.

The answer is, yes you can contribute to a traditional IRA no matter what your income is. However, if you have access to a 401K plan or 403B or a 457, any employer plan, the IRS will then look at your modified gross income or modified AGI and say if you’re over a certain limit, part of your traditional IRA contribution will not be deductible on your income tax return.

So, let’s go over an example. The limits if you’re single are between $66,000 and $76,000. So, for example, if I’m single and make $80,000 then I am over the limit of $76,000. None of my traditional IRA contributions would be deductible. So how it would work is you would put your $6,000 if you’re under 50 years old and $7,000 if you’re over 50 into your traditional IRA. That piece later in retirement would not be taxed again.

Now, I know that’s confusing because a regular, traditional IRA, you put the money in, you take your tax deduction, it grows over many years, then you go to retire, you take the money out, you pay taxes on what you withdrawal. In this case, because you didn’t take the IRA deduction, or you couldn’t take the IRA deduction, the portion of funds that you put in, that you never took that deduction on will not be taxed again in later retirement.

So, what does this mean? This means an accountant, or financial advisor or you have to keep track of what you have put in that wasn’t ever deducted on your taxes. The gains, or money made in the account, will be tax-deferred. Tax deferral meaning I don’t own capital gains tax on the money that I make. So the money that should have gone to taxes stayed in the account and was able to stay invested. So that matters, that’s a good thing. So, it’s tax-deferred.

Growing over many, many years, the portion that is gains will be taxed at income tax rates. But the portion that you didn’t deduct will not be taxed again. Which is actually kind of nice. So you need to talk to your financial advisor or your accountant if that makes sense to you. If you have access to an employer plan and you make over the limit, should I still be putting into that Traditional IRA? The married filing joint limit by the way is between $105,000 and $125,000 of modified AGI. They phase out the deduction. So a portion of the contribution would not be deductible. So over the $125,000, you would not be able to deduct any of that contribution.

So, again it’s something you need to consider. Should I still be putting money away in a traditional IRA even though I can’t deduct it. Because some of you might make it over the Roth limit. So what if I can’t do a Roth and I can’t do a traditional and deduct it and I’m making out my 401K. Where do you put funds?

So, you may still want to consider putting that money in the traditional IRA even though you can’t deduct it. Of course, you can always look into a traditional investment account that isn’t a retirement account that doesn’t have income limits.

I hope you learned something. If you have any questions, feel free to reach out to us.