2020 IRA contribution deduction limit

[t2121]

I am 55 and my wife is 52. We're going to file joint tax return for 2020. We both have employer-sponsored retirement plan (401K). My wage on line 1 W2 would be $57800 and my wife $59200, the combined taxable income $117000. What is the maximum deductible contribution limit for us?  My understanding that the maximum contribution limit is $7000 for each if our combined income below $104000. Is $104000 are from W-2 or W2 minus our IRA contribution? Thank for answering

[Critter-3]

What’s New for 2020

Modified AGI limit for traditional IRA contributions increased. For 2020, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:

• More than $104,000 but less than $124,000 for a married couple filing a joint return or a qualifying widow(er),

• More than $65,000 but less than $75,000 for a single individual or head of household, or

• Less than $10,000 for a married individual filing a separate return.

Modified AGI limit for certain married individuals increased.

 

If you are married and your spouse is covered by a retirement plan at work and you aren’t, and you live with your spouse or file a joint return, your deduction is phased out if your modified AGI is more than $196,000 (up from $193,000 for 2019) but less than $206,000 (up from $203,000 for 2019). If your modified AGI is $206,000 or more, you can’t take a deduction for contributions to a traditional IRA.

Form 1040 or 1040-SR.    https://www.irs.gov/pub/irs-pdf/p590a.pdf

Use this worksheet to figure your modified AGI for traditional IRA purposes.

1.	Enter your adjusted gross income (AGI) from Form 1040 or 1040-SR, line 8b; or Form 1040-NR, line 35, figured without taking into account the amount from Schedule 1 (Form 1040 or 1040-SR), line 19; or Form 1040-NR, line 32	1.	_____
2.	Enter any student loan interest deduction from Schedule 1 (Form 1040 or 1040-SR), line 20; or Form 1040-NR, line 33	2.	_____
3.	Enter any tuition and fees deduction from Schedule 1 (Form 1040 or 1040-SR), line 21	3.	_____
4.	Enter any foreign earned income exclusion and/or housing exclusion from Form 2555, line 45	4.	_____
5.	Enter any foreign housing deduction from Form 2555, line 50	5.	_____
6.	Enter any excludable savings bond interest from Form 8815, line 14	6.	_____
7.	Enter any excluded employer-provided adoption benefits from Form 8839, line 28	7.	_____
8.	Add lines 1 through 7. This is your Modified AGI for traditional IRA purposes	8.	_____

[dmertz]

If your modified AGI is $117,000, you each fall in the $104,000 to $124,000 phase-out range.  The maximum deduction for each of your traditional IRA contributions will depend on your your actual AGI, but calculating based on a modified AGI of exactly $117,000, the maximum deduction for each of you separately would be:

$7,000 * ($124,000 - $117,000)/ $20,000 = $2,450

With each of you contributing at least $2,450 to traditional IRAs, your maximum combined IRA deduction would be $4,900.

Your modified AGI is your AGI with any deduction for a traditional IRA contribution added back.  In other words, your modified AGI is effectively figured without any IRA contribution.  (There are a few other modifications that are made to AGI for this purpose, but they are uncommon and unlikely to apply in this simple case.  See Critter-3's answer for these details.)

You are under the well under the beginning of the phase-out range for a Roth IRA contribution, so whatever portion of the $7,000 contribution limit each of you does not contribute to a traditional IRA can be contributed to a Roth IRA instead.  You might each just contribute the entire $7,000 limit to Roth IRAs for the eventually tax-free growth instead of tax-deferred growth.  The relatively low tax rates at the moment make the deduction for traditional IRA contributions harder to justify than when tax rates are higher.  Tax rates are scheduled to go back up in 2026.

[SteamTrain]

......and, don't forget that its not just wages that make up your AGI. 

It's most of your other income too.   Interest, Dividends, Capital Gains and most year-end distributions from Mutual Funds (much of it this month) .

[jimb108]

I am using Premier (desktop).  My wife is covered by a retirement plan at work (403b). I am not covered at work. Our AGI is $128,213.  (we had none of the items listed to add for MAGI, so I believe our MAGI is the same as AGI) We are married filing jointly.  In our case, only one spouse is covered by a retirement plan at work, so shouldn't the IRA deduction be phased out at $196,000, not $124K.

However when using TT Premier and answering all the IRA questions it specifically says my wife's MAGI is too high, over $124K) so she cannot get a deduction.  If we are filing jointly and only one of us is covered by a retirement plan at work shouldn't the limit be $196K? What am I missing in her MAGI?   Is it looking at her income only or our combined income?

[dmertz]

jimb108, the deduction for an IRA contribution for the spouse who is covered by a workplace retirement plan phases out between $104,000 and $124,000 for 2020.  That means that your wife's traditional IRA contribution is nondeductible.  However, because you are not covered by a workplace retirement plan the deduction for your own traditional IRA contribution phases out between $196,000 and $206,000.

https://www.irs.gov/retirement-plans/plan-participant-employee/2020-ira-contribution-and-deduction-l...