Contributions to IRA deductible or non-deductible

[fcrivero]

Hello, 

I just opened a traditional IRA account with Merrill. Everytime I want to contribute to my account it is asking whether the contribution would be recorded as deductible or as non-deductible. I am confused on which of both options should I pick. If I pick deductible, how should I report that into Turbotax. On the other hand, if I choose non-deductible, how do I enter it into Turbotax as well?

[LinaJ2020]

If you take a deduction of your contribution on your tax return, it is considered as deductible.  If you do not take deduction on your taxes, it is a non-deductible contribution.  By taking the deduction, it will reduce your taxable income hence taxes.  It is a tax break.

To enter the deduction on your return, here are the steps:

In TurboTax online,

1. Sign in to your account and select Pick up where you left off
2. From the upper right menu, select Search and type in ira contributions and Enter
3. Select the Jump to 
4. Follow prompts to enter your contribution amount.

The deduction will show on line 10A of your Form 1040 ( carried over from Schedule 1 line 19)

If you do not want to take the deduction, you do not need to enter contribution amount on your taxes. 

Whether your deduct your traditional IRA contribution on your taxes does play an important role when you withdraw money from your IRA account in the future.  If you take deduction of your IRA, part of your distribution will be taxable.  For the contribution amount you did not deduct, it will not be taxable upon distribution, it is considered as your basis.  It is tax free.  However, you need to keep track on those nondeductible amount / tax free portion.  To keep track on the amounts, you would need to file a Form 8606.  Click here: https://www.irs.gov/forms-pubs/about-form-8606

For more information, read here: 

Nondeductible contribution

IRA deductions

To enter nondeductible contribution in TurboTax online, here are the steps:

• Sign in to your account and select Pick up where you left off 
• From the upper right menu, select Search and type in 1099r and Enter
• Select the Jump to 1099r
• Follow prompts
• On screen, Any Nondeductible Contributions to Taxpayer's IRA?, select Yes
• Next screen, Let's Find Your IRA Basis, enter information
• Continue to proceed

Hope it helps to clear some of your confusion. 

[Opus 17]

You can contribute $6000 to an IRA, or $7000 if you are age 50 or over.  Obviously, it is to your advantage to make deductible contributions, that's the whole point of an IRA.  You make tax-free contributions now (deduct the contribution from your taxable income so it is non-taxed), your investment grows without paying taxes in the intervening years, and then you pay all the income taxes when you withdraw the money in retirement.

However, some people are in a situation where they can't deduct their contributions, depending on their job status, income, and tax filing status.  See here for adjustments to the deductibility limits.

https://www.irs.gov/retirement-plans/ira-deduction-limits

If you can't make deductible contributions, or if your deductible contribution is limited, you might still prefer to make a non-deductible contribution, instead of investing in a regular brokerage account.  Your IRA still grows tax free, and your eventual withdrawals are partly tax-free since some of the original contributions were taxable.  (If you pay more tax going in, you pay less tax taking out, and vice versa.)

That's the point of the question about deductible or non-deductible IRA contributions.  Whether a contribution is intended to be deductible or non-deductible when you make it is something you indicate on the contribution form.

If Turbotax finds that, due to your other circumstances, you have exceeded your allowable deductible contribution limit, you will have a couple of options at that point to correct the situation.