Deductibility of Contributions — Individual Retirement Accounts

Overview

Individuals may contribute up to $7,500 (2026) or 100% of earnings to an IRA. All or part of that contribution may be tax-deductible, depending on the individual’s level of income and whether he or she participates in an employer-sponsored retirement plan.

An immediate tax deduction for contributions is a key advantage of an IRA. Indeed, for many, the current tax deduction is the motivating factor for making a contribution. In 1986, the last year for which all IRA contributions were deductible, Americans deposited $38 billion into IRAs. In 1987, when many depositors could no longer deduct their contributions, IRA deposits fell to $14 billion.

Active Participation

Contributors who are not covered by another qualified retirement plan during the year may deduct the full amount of any contributions made that year, regardless of income. If the individual is an active participant in a qualified plan, he or she may still make a deductible IRA contribution — but the deduction is phased out at certain income levels.

For purposes of these rules, an employee is an “active participant” if he or she is eligible to be covered by:

A qualified pension, profit-sharing, or stock bonus plan, including 401(k)s
A qualified annuity plan
A tax-sheltered annuity plan
A Simplified Employee Pension (SEP)
A SIMPLE plan
A plan established by a local, state, or federal government or agency

Contributors should review their status each year. Individuals who were active participants in previous years may not be so in the future due to changes in employment, changes in existing employer plans, etc. To be considered an active participant, the employee must be eligible to be covered by the plan at any time during the year.

Active participant status does not depend on whether an individual’s rights under the plan are nonforfeitable (“vested”), nor on whether monies were contributed to the plan on behalf of the employee.

Example 1: Shannon is a participant in her employer’s 401(k) plan. Shannon is only 40% vested in the plan and makes no contribution to it this year. She is nonetheless considered an “active participant” for IRA deductibility purposes.

Example 2: Leroy qualifies for his employer’s profit-sharing plan. Due to financial difficulties, Leroy’s employer elects not to make plan contributions this year. Leroy is still considered an “active participant” when deciding if his IRA contributions are deductible.

An individual’s employer (or former employer) will report on the employee’s W-2 form whether the employee is considered an active participant for the tax year.

The active participant status of one spouse is not attributed to the other spouse. Special income phase-out rules apply where an individual is not an active participant but whose spouse is (discussed below).

If an IRA holder is receiving retirement benefits from a previous employer’s plan but is not eligible under his or her current employer’s plan, the holder is not considered to be an active participant — and may fully deduct any IRA contributions.

Income Thresholds & Phase-Out Ranges (2026)

If an individual is not an active plan participant for any part of the year, he or she can take a full deduction for all IRA contributions regardless of income. However, if an individual is an active participant, the deduction may be fully available, partially available, or eliminated entirely — depending on modified adjusted gross income (MAGI).

Filing Status	Full Deduction	Partial Deduction (Phase-Out)	No Deduction
Single / Head of Household	MAGI ≤ $81,000	$81,000 – $91,000	MAGI ≥ $91,000
Married Filing Jointly (contributor covered)	MAGI ≤ $129,000	$129,000 – $149,000	MAGI ≥ $149,000
Married Filing Separately (active participant)	None	$0 – $10,000	MAGI ≥ $10,000
Not covered, but spouse is covered (MFJ)	MAGI ≤ $242,000	$242,000 – $252,000	MAGI ≥ $252,000

Within the phase-out range, the allowable deduction is reduced proportionally. The deduction is reduced by the same fraction that the excess income bears to the $10,000 (single) or $20,000 (married filing jointly) phase-out range, with the result rounded to the nearest $10. A minimum deduction of $200 is allowed as long as the taxpayer is within the phase-out range.

Example: Jim Jones, age 37, is an active participant in his company’s 401(k) plan. He contributes $7,500 to his IRA in 2026 and files a single return with MAGI of $86,000. His income exceeds the $81,000 threshold by $5,000, which is 50% of the $10,000 phase-out range. His deduction is reduced by 50%, so he may deduct $3,750 of his $7,500 contribution.

If an active participant’s income exceeds the upper end of the phase-out range, the individual may not deduct the IRA contribution — although he or she may still make the contribution as a nondeductible contribution.

Deductions for Spousal IRAs

An individual will not be considered an active participant merely because his or her spouse is an active participant. However, the deduction for a non-participant spouse is phased out at higher income levels.

For 2026, deductions for IRA contributions by a non-active-participant spouse are phased out when the couple’s joint MAGI is between $242,000 and $252,000. In other words, a non-participant spouse may take a full deduction if joint income is under $242,000.

This phase-out rule does not apply to married individuals who file separately and live apart at all times during the tax year. For these filers, contributions of an active participant’s spouse are always nondeductible.

Example 1 — Both nondeductible: Norton is covered by a 401(k) plan at work. His wife, Trixie, is a full-time homemaker. They file jointly with MAGI of $255,000. Neither Norton nor Trixie may make deductible IRA contributions — they exceed the upper threshold of $252,000 for the non-participant spouse phase-out, and Norton’s income far exceeds the $149,000 ceiling for active participants.

Example 2 — One deductible, one not: Assume Norton and Trixie’s joint income is $200,000. Trixie can make a fully deductible contribution because she is not an active participant and their joint income is below $242,000. Norton cannot deduct his contribution because he is an active participant and their income exceeds the $149,000 ceiling for married active participants — but he may still contribute on a nondeductible basis.

Example 3 — Partial deduction: If their joint income is $246,000, Trixie would be entitled to a partial deduction (their income falls within the $242,000–$252,000 phase-out range for non-participant spouses). Norton’s contribution remains nondeductible.

Nondeductible Contributions

While not as advantageous as a deductible contribution, individuals may make nondeductible contributions to a traditional IRA. This is an option for individuals whose IRA deductions are reduced or eliminated because of the phase-out described above, or who are unable to contribute to a Roth IRA because of income restrictions.

Since distributions from a nondeductible IRA will be partially taxed as earnings and partially a tax-free return of contribution, the contributor must maintain records of his or her “cost basis.” Form 8606 is used to report nondeductible IRA contributions to the IRS and is filed with the contributor’s tax return. The taxpayer may designate an IRA contribution as nondeductible — or revoke the designation — at any time up to the filing date for the tax year. Both deductible and nondeductible contributions may be made to a single IRA.

Individuals may also make nondeductible contributions to Roth IRAs, subject to income eligibility. For 2026, the ability to contribute to a Roth IRA phases out for single taxpayers with MAGI between $153,000 and $168,000, and for joint filers with MAGI between $242,000 and $252,000. Because qualified withdrawals from a Roth IRA are entirely tax-free, a Roth IRA is generally a better opportunity than a nondeductible traditional IRA for those who qualify. (See Roth IRAs →)

There are disadvantages to nondeductible IRA contributions. There is paperwork involved in keeping track of basis, and since contributions do not reduce taxable income, other investment vehicles may be more attractive — especially given that IRA withdrawals are subject to early-withdrawal penalties.

Taxpayers who fail to file Form 8606 are subject to a penalty of $50. Those who overstate nondeductible contributions — and thereby inflate the tax-free portion of a future distribution — must pay a $100 penalty. If a taxpayer fails to file Form 8606 when required, the IRS will fully tax all distributions from those contributions. It may make sense to file delinquent forms and pay the penalties before taking a distribution — this establishes a cost basis so that only the earnings portion, not the entire distribution, is taxed. (See IRA Distributions →)

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