Retirement Alert: How to Determine if Your Traditional IRA Contribution Is Deductible

February 2, 2017 12:25 PM
By Brian Dobbis

Do you know what it means to be an "active participant" in an employer plan? The details may surprise you—and help your nest egg.


With tax time fast approaching, I often encounter confusion about what can and cannot be done with traditional IRAs and defined contribution [DC] plans in different scenarios. So here are some pointers that might help you juggle the two.

The traditional individual retirement account (IRA) was created in 1974 through the passage of Employee Retirement Income Security Act (ERISA). According to the Investment Company Institute, more than 32 million households own a traditional IRA, making it the most common type of IRA, representing approximately 25% of U.S. households. 

Each tax year, an investor may contribute up to certain limit, which for both 2016 and 2017 is $5,500, plus $1,000 catch-up for those investors age 50-plus. The aforementioned limits are in addition to 401(k) salary deferrals, if any. In addition, tax law allows taxpayers to fund their IRAs for the prior tax year until their tax-filing deadline.

By way of example, a taxpayer can make a 2016 IRA contribution until April 18, 2017. (Note: The deadline is generally April 15; the extra days are due to the fact that April 15 falls on a Saturday this year, and on the following business day, Monday, April 17, Emancipation Day is being observed in Washington, D.C.)

Deducting Your IRA Contributions
This is the time of the year when a majority of IRA contributions are made. Contributions to a traditional IRA can be made with pretax and/or aftertax dollars, which leads to the inevitable question of what determines the deductibility of traditional IRA contributions.

If you are covered by an employer-sponsored plan and your household income exceeds certain government-imposed limits, then you are not eligible to deduct your IRA contributions. However, if are not an active participant (in an employer plan), then you can deduct your IRA contribution, regardless of income.

When is an individual considered an active participant in an employer-sponsored plan? What kinds of plans are considered employer-sponsored plans?

Anyone who is married, filing jointly, may be surprised to learn that if one spouse is an active participant in a qualified plan, the other spouse also is considered an active participant. In that case, though, a higher income threshold would apply, thus allowing more taxpayers to make deductible contributions.

An active participant generally is considered an individual in an employer-sponsored retirement plan who receives a contribution under a DC plan, or is not excluded from participation from a defined benefit plan. For this purpose, DC plans include SEP, SIMPLE, and SAR SEP; 403(b); certain government plans; 401(k)s; profit sharing; stock bonus; money purchase; ESOP; and target benefit plans. The final determination of whether individuals are deemed active participants depends on the type of plan sponsored by their employer. 

Generally if box 13 “Retirement Plan,” located on IRS Form W-2, is checked you are considered an active participant for the purpose of making a deductible IRA contributions. Table 1 outlines more specifics.


Table 1.  How to Tell Whether You Are Covered by an Employer Plan

Source: Denise Appleby, Appleby Retirement Consulting


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Hello. On 401(k) plans, does a spouse have to name the other spouse as beneficiary, or can they name their estate? Also, does a spouse have to consent to this process? (The couple lives in Ohio.) I like the information here. So I will follow on regular basis. Thanks.
Al, thanks for the question. Most employer-sponsored retirement plans, such as a 401(k), are subject to the Employee Retirement Income Security Act (ERISA) that require a married plan participant to name his/her spouse as beneficiary. However, the beneficiary can be changed upon the spouse waiving their rights. I suggest checking with your company benefits administrator to ensure your changes are updated properly.

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