Know These Rules Before You Miss a Valuable Tax Deduction

Making a deductible IRA contribution seems simple. However, in some cases for high earners the rules are not as simple and can be a little confusing.

Your income, filing status, and employer benefits can complicate the rules. Let me walk you through 10 essential facts that I have posed into questions that help determine if you qualify for a deductible IRA contribution in 2025. 

Along the way, I’ll share real examples and tips I use with clients here at A Small Investment. Quick note throughout this insight I use active participant and covered interchangeably. 

1. Do You or Your Spouse Have Earned Income?

If No, you are not able to contribute to a IRA. You or your spouse must have earned income. 

This is the starting place for determining if you can make a deductible IRA contribution. If the answer is Yes.

Then, the IRS allows IRA contributions. This includes wages, salary, and self-employment income.

If you’re retired or living on investment income alone, you can’t contribute. That’s true even if you’re sitting on millions in savings. 

Consider someone who sold a business last year and is receiving a structured payout for the next 5 years. The IRS does not consider this earned income and can not be used for making a deductible IRA contribution.

2. Are You Covered by an Employer Retirement Plan?

Having a 401(k), 403(b), or similar plan makes a deductible IRA contribution more strict. If you or your spouse are “active participants,” then your income determines how much of your IRA contribution is deductible. 

If any amount is deductible. This is where high earners often get tripped up.

Let’s look at both Yes and No, for the question: are you an active participant of an employer retirement plan? 

If yes and single, then what is your modified adjusted gross income?

• MAGI of less than $79,000 can receive a full deduction for their IRA contribution. 
• Between $79,000 and $89,000 a partial deduction can be taken.

MAGI over $89,000 no deduction is allowed for your contribution. However, you can still contribute to an IRA, you will not receive the tax deduction.

If yes and Married Filing Jointly, then what is your modified adjusted gross income?

• MAGI of less than $126,000 can receive a full deduction for their IRA contribution. 
• Between $126,000 and $146,000 a partial deduction can be taken.

MAGI over $146,000 no deduction is allowed for your contribution. However, you can still contribute to an IRA, you will not receive the tax deduction.

If yes and only one spouse is an active participant, then what is your modified adjusted gross income?

• MAGI of less than $236,000 can receive a full deduction for their IRA contribution. 
• Between $236,000 and $246,000 a partial deduction can be taken.

MAGI over $246,000 no deduction is allowed for your contribution. However, you can still contribute to an IRA, you will not receive the tax deduction.

In Questions 3 and 4 I explore filing status and MAGI in a quick reference format. Feel free to skip these questions.

3. What’s Your Filing Status?

Deduction limits vary depending on whether you file single or married filing jointly, and if you are an active participant in a retirement plan. This was discussed in the previous question but I wanted to separate it out here in order to provide a quick reference. 

In 2025:

• Single filers: Full deduction if your MAGI is $79,000 or less
• Married, both covered: Full deduction if MAGI is $126,000 or less
• Married, one covered: Full deduction if MAGI is $236,000 or less

These numbers matter. Consider this scenario one spouse has earned income and the other works within the home as a homemaker. 

Although the spouse that does not have earned income can still have contributions made on their behalf to an IRA, and receive a full tax deduction if their MAGI is below the limit. 

4. What Is Your Modified Adjusted Gross Income (MAGI)?

Now let’s take the same information but look at it from the perspective of modified adjusted gross income. MAGI determines if you get a full deduction, partial deduction, or none at all.

If you’re married and earn $246,000+, you get no deduction if either of you is covered by a plan. Same with singles earning $89,000+.

If you are married and one spouse is covered by the plan and you earn more than $146,000 then you will not receive a deduction. And no matter if you file single or married, and you do not actively participate in a workplace retirement plan then you are able to make deductible IRA contributions.

Not sure how MAGI works? Check out our guide to key financial numbers to see how MAGI fits in your overall plan.

5. Did You Already Contribute to a Roth IRA?

The IRS has set a maximum that someone could contribute to an IRA. Your total max contribution to an IRA Roth and Traditional IRAs is $7,000 ($8,000 if over 50). 

If you maxed your Roth, you can’t also make a full Traditional IRA contribution. Therefore, keep this in mind when deciding what best fits your needs.

For many high earners, Roth IRA contributions are off the table due to income. If your income is over $165,000/single and $246,000/married then you can not contribute to a Roth IRA directly. 

More on this in question number 8. 

Therefore, your maximum IRA contribution is 

• $7,000 50 years and under, and 
• $8,000 for 50 and better. 

Read more about your options in Which Is Better: Traditional or Roth?

6. Are You Age 50 or better?

If so, you can contribute $8,000 instead of $7,000. This “catch-up contribution” is especially helpful for those playing retirement catch-up. 

Consider someone that’s 58 years of age, and plans to retire in seven years at 65. They are able to make an additional $1,000 contribution each year until retirement. 

This additional catch contribution amount is very helpful in adding to the compound interest effect in the IRA account.

7. Do You Want to Reduce Taxes This Year?

Who does not want to reduce their taxes this year or any year. A deductible IRA contribution lowers your taxable income today.

After reviewing question 3, 4, and 5 you now know if you are able to make a deductible IRA contribution. Now take it a step further and do analysis of your current tax situation and your potential retirement tax situation. 

Depending on your income in retirement it may be best to make contributions to an IRA or Roth. Why do I say that?

If you are going to have a higher taxable income in retirement then having more Roth assets is best. However, if you are going to have less income in retirement than your working years then contributions to a Traditional IRA would be best.

Learn more tax strategies in How to Save Money on Taxes

Note: This calculator assumes you are covered by a work place retirement plan for Traditional IRA Deductibility. This is a simplified calculation. Actual tax situations can be complex, and you should consult a tax professional for advice aligned to your situation.

8. What if You Don’t Qualify for a Deduction?

You can still make a non deductible IRA contribution and later convert it to a Roth IRA. This is often called the Backdoor Roth strategy.

But tread carefully. If you already have pre-tax IRA funds, the pro-rata rule complicates this move. 

I help clients run the numbers to avoid costly surprises. And how this works in practice is a Traditional IRA that has never had pre tax contributions is used to make the initial contribution.

Then, the assets in that traditional IRA are converted (moved/transferred) to the Roth IRA, and this is the back door Roth strategy. Therefore, if you earn more than the maximum to contribute to a Roth IRA directly you can use this approach to establish a Roth IRA. 

9. Are You Already Maximizing Other Retirement Accounts?

Before jumping into an IRA, ask yourself:

• Are you maxing out your 401(k)?
• Have you claimed your employer match?

If those are covered, an IRA could be a great supplement. Keep in mind most retirement plans allow you to contribute more to the account within a year than you can with a Traditional IRA or Roth. 

I cover this more in How Much Should You Save for Retirement?

10. Do You Have a Plan for Your Retirement Income?

An IRA isn’t just about today’s tax deduction. It’s about your future income stream.

Whether you plan to use IRAs, annuities, or pensions, it’s smart to think through tax buckets and withdrawal strategies. 

Paring this with social security it’s more than beneficial to determine a plan for your withdrawal. If you haven’t thought this through, my post Should I Use an Annuity for Retirement Income? can help.

Bonus: IRA Deduction Limits at a Glance

Contributions can’t exceed your earned income. This means that if you have earned income of $4,000 you can not contribute the maximum amount.

You will be limited to $4,000 as your max that you can contribute to an IRA. 

What’s Next, deductible IRA contribution in 2025

Making a deductible IRA contribution sounds simple, but most of my clients are surprised by the rules. That’s why I take a personalized approach.

When you’re earning more and managing complex income, the little details make a big difference.

Ready to optimize your tax plan?

• Access your 3-Day Financial Organization Challenge
• Schedule a session with me  Andre Small Founder and Lead Financial Planner at A Small Investment

Let’s take the guesswork out of your retirement savings.

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