Traditional IRA contributions and 401k

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Are we able to take a deduction for IRA contributions and from our 401k? Where do we include that on our tax return form? Does this reduce our taxable income, which in case may lower our tax bracket so we pay less taxes?

O

Opus 17Answer

Level 15

Remember that although the 401(k) and IRA have a similar purpose, they are controlled by different sections of the tax laws and some of the rules regarding contributions and withdrawals are very different between the two types of accounts. You also said “we“, but retirement accounts are owned by specific individuals only and there is no such thing as a joint account.

If you contribute to a pretax 401(k), that money is removed from your paycheck and removed from your W-2 before you ever receive the W-2. Your box 1 taxable wages will be reduced by the amount of pretax contributions, and this does reduce your taxable income. When preparing your tax return, you don’t enter the 401(k) anywhere else, the information will be captured from the W-2 only. Your maximum 401(k) contribution is $19,500 per year, or $26,000 per year if you are age 50 or older.

An IRA is an individual account that you own through your bank or stockbroker service. You make contributions from your after-tax money. If you contribute to a traditional pretax IRA, you will claim a tax deduction for that contribution when you file your tax return, and that will also reduce your taxable income and the amount of taxes you pay. However, if you have a qualified retirement plan at work, your ability to contribute to a pre-tax IRA may be reduced or eliminated, depending on your work income. Check the IRS guidelines at the link provided in the earlier answer. Your maximum IRA contribution is $5000 per year, or $6000 per year if you are age 50 or older.

You and your spouse may each own a separate IRA. Your spouse’s IRA may be funded from your work earnings even if your spouse does not have a job of their own. Contributions may be limited as indicated above, check the IRS link.

Separately from the discussion of pretax 401(k) plans and pretax IRAs, we need to talk about the Roth option. You can contribute to a Roth IRA, and you may be able to contribute to a Roth option in your 401(k). Your contribution limits to Roth plans are combined with your contribution limits to traditional plans; in other words, you can’t contribute $5000 to a Roth IRA and another $5000 to a pretax IRA, but you could contribute $5000 to a combination of Roth and pretax IRAs.

With a Roth IRA or Roth option 401(k), your income is not reduced at the time of the contribution and you do not get a tax deduction. However, when you retire and begin withdrawing the money, you will pay no income tax on your withdrawals. This is different from a traditional IRA or pretax 401(k) where you pay regular income tax on the withdrawals. Depending on your age and income, the Roth option may be a significantly better option for you, as you would lose a small tax deduction now in return for enormous tax savings later.

Hal_Al

Level 15

Q. Are we able to take a deduction for contributions to our 401k?

A. Simple answer: no. But that's because you have already been given a deduction. 401k contributions are made via pre tax deductions from your pay. Note that the amounts in boxes 1 and 5 of your W-2 are different. The amount in box 1 does not include your 401k contribution, so that amount is not entered as taxable income on your tax return.

Q. Are we able to take a deduction for IRA contributions?

A. Maybe. People with a 401k (and/or other retirement plans) can only get a IRA deduction if their modified adjusted gross income (MAGI) is below certain levels Enter your contribution in TurboTax (TT) and TT will determine if you are eligible. For details, see https://www.irs.gov/retirement-plans/2021-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

Q. Does this reduce our taxable income, which in case may lower our tax bracket so we pay less taxes?

A. Yes. In the case of the 401k contribution, that has effectively already been done. If eligible, the IRA deduction lowers your taxable income by an adjustment (deduction) to income on line 19 of Schedule 1.

O

Opus 17

Answer

Level 15

Remember that although the 401(k) and IRA have a similar purpose, they are controlled by different sections of the tax laws and some of the rules regarding contributions and withdrawals are very different between the two types of accounts. You also said “we“, but retirement accounts are owned by specific individuals only and there is no such thing as a joint account.

If you contribute to a pretax 401(k), that money is removed from your paycheck and removed from your W-2 before you ever receive the W-2. Your box 1 taxable wages will be reduced by the amount of pretax contributions, and this does reduce your taxable income. When preparing your tax return, you don’t enter the 401(k) anywhere else, the information will be captured from the W-2 only. Your maximum 401(k) contribution is $19,500 per year, or $26,000 per year if you are age 50 or older.

An IRA is an individual account that you own through your bank or stockbroker service. You make contributions from your after-tax money. If you contribute to a traditional pretax IRA, you will claim a tax deduction for that contribution when you file your tax return, and that will also reduce your taxable income and the amount of taxes you pay. However, if you have a qualified retirement plan at work, your ability to contribute to a pre-tax IRA may be reduced or eliminated, depending on your work income. Check the IRS guidelines at the link provided in the earlier answer. Your maximum IRA contribution is $5000 per year, or $6000 per year if you are age 50 or older.

You and your spouse may each own a separate IRA. Your spouse’s IRA may be funded from your work earnings even if your spouse does not have a job of their own. Contributions may be limited as indicated above, check the IRS link.

Separately from the discussion of pretax 401(k) plans and pretax IRAs, we need to talk about the Roth option. You can contribute to a Roth IRA, and you may be able to contribute to a Roth option in your 401(k). Your contribution limits to Roth plans are combined with your contribution limits to traditional plans; in other words, you can’t contribute $5000 to a Roth IRA and another $5000 to a pretax IRA, but you could contribute $5000 to a combination of Roth and pretax IRAs.

With a Roth IRA or Roth option 401(k), your income is not reduced at the time of the contribution and you do not get a tax deduction. However, when you retire and begin withdrawing the money, you will pay no income tax on your withdrawals. This is different from a traditional IRA or pretax 401(k) where you pay regular income tax on the withdrawals. Depending on your age and income, the Roth option may be a significantly better option for you, as you would lose a small tax deduction now in return for enormous tax savings later.

A

az148Author

Level 5

@Opus 17 Thank you for your detailed feedback here! As you mentioned, our 401k contributions are captured through Box 1 on our w-2 therefore we don't need to enter in anywhere else on the tax return. What about for pre-tax IRA contributions, do we input that somewhere on our tax returns or is that filed automatically by our bank? thank you!

O

Opus 17

Level 15

@az148

You must report your own pretax IRA contributions on your tax return. If you are preparing your own returns on paper, deductible contributions are reported on schedule 1, line 19. If you are using tax software, make sure you enter them in the IRA section on the deductions and credit page.

While the IRS will eventually get a copy of your contribution information from the bank, they only use this information to verify that you paid the correct tax (if any was owed) and that you are eligible to make deductible contributions. If you are not eligible to make deductible contributions because of your income or other tax situations, the IRS will assess a bill for additional tax. But the IRS will not give you any deduction unless you claim it in writing with your signature.