Retirement Contribution Deduction

How it works

1. 1. Identify contribution type and applicable limit

   401(k)/403(b): $23,000 base (2024) / $23,500 (2025) + $7,500 catch-up (age 50+). Traditional IRA: $7,000 + $1,000 catch-up. SEP IRA: lesser of $69,000 (2024) / $70,000 (2025) or 25% of compensation. SIMPLE IRA: $16,000 + $3,500 catch-up. HSA: $4,150 individual/$8,300 family (2024); $4,300/$8,550 (2025).

2. 2. Apply deductibility rules

   401(k)/SEP/SIMPLE: Always deductible regardless of income. Traditional IRA: Fully deductible if neither the contributor nor their spouse is an active participant in a workplace plan. If coverage applies, a phaseout reduces or eliminates the deduction based on MAGI. Roth contributions are never deductible. Active participant status is determined by whether the person has any 401(k), 403(b), SIMPLE IRA, SEP-IRA, pension, or profit-sharing plan contributions in the projection year — not by Traditional or Roth IRA contributions.

   Deductible Amount = Contribution Amount × Deductible Fraction
   Deductible Fraction = 1.0 if no coverage applies; otherwise see Step 3

3. 3. Calculate Traditional IRA phaseout (if applicable)

   The phaseout range and coverage rule depend on which spouse has workplace plan coverage. There are three distinct paths: 1. Contributor is covered by a workplace plan: • 2024: Single/HOH $77,000–$87,000; MFJ $123,000–$143,000 • 2025: Single/HOH $79,000–$89,000; MFJ $126,000–$146,000 2. Contributor is NOT covered, but spouse IS covered (spousal IRA — MFJ only): • 2024: $230,000–$240,000 • 2025: $236,000–$246,000 This is a distinct, much higher phaseout range that applies only when the contributing spouse has no workplace plan of their own. 3. Married Filing Separately (any coverage): • All years: $0–$10,000 (the most restrictive range) If neither spouse has coverage, the deductible fraction is 1.0 (no phaseout). The deductible amount is rounded to the nearest $10, per IRC §219(g)(2).

   Deductible Fraction = max(0, (upper limit − MAGI) / (upper limit − lower limit))
   Deductible Amount = round(Contribution × Fraction / 10) × 10

4. 4. Sum total deductible contributions

   Add all deductible contributions across all account types. This becomes an adjustment to income on Form 1040 Schedule 1, reducing AGI before calculating taxable income.

   Total Deduction = 401k + Deductible IRA + SEP + SIMPLE + HSA

Worked example

**Step 1: Identify Limits**
- 401(k) limit: $23,000 base + $7,500 catch-up = $30,500
- Traditional IRA limit: $7,000 base + $1,000 catch-up = $8,000
- HSA limit (family, 2025): $8,550

**Step 2: Apply Deductibility Rules**
- 401(k): Always deductible
- HSA: Always deductible
- Traditional IRA: Subject to phaseout (covered by workplace plan)

**Step 3: Calculate IRA Phaseout**
- MAGI: $180,000
- Phaseout range (MFJ): $123,000 - $143,000
- Status: Above upper limit
- Deductible IRA: $0 (fully phased out)
- **Note**: Could contribute to Roth IRA instead (different phaseout)

**Step 4: Sum Total Deduction**
- 401(k): $30,500 (deductible)
- Traditional IRA: $0 (phased out)
- HSA: $8,550 (deductible, 2025 family limit)
- Total Deduction: $30,500 + $0 + $8,550 = $39,050

**Tax Savings**
- AGI reduction: $39,050
- Marginal tax rate: 24%
- Federal tax savings: $39,050 × 0.24 = $9,372
- Plus: Avoids 1.45% Medicare tax on 401(k) portion: $30,500 × 0.0145 = $442
- Total savings: ~$9,814
      

Real-world context

What drives the result

Assumptions

• 2024 contribution limits: 401(k) $23k, IRA $7k, SEP $69k, SIMPLE $16k, HSA $4,150/$8,300 individual/family
• Catch-up contributions available: 401(k) +$7.5k, IRA +$1k, SIMPLE +$3.5k (age 50+)
• Traditional IRA phaseout ranges (2024): contributor covered — Single $77k–$87k, MFJ $123k–$143k; spousal IRA (MFJ, contributor not covered) — $230k–$240k; MFS — $0–$10k
• Traditional IRA phaseout ranges (2025): contributor covered — Single $79k–$89k, MFJ $126k–$146k; spousal IRA (MFJ, contributor not covered) — $236k–$246k; MFS — $0–$10k
• Active participant status is triggered by any 401(k), 403(b), SIMPLE IRA, SEP-IRA, pension, or profit-sharing plan contribution in the year; Traditional and Roth IRA contributions do not create active participant status
• MAGI for IRA phaseout is approximated from projection income, excluding IRA distributions (computed later in the pipeline) and applying an approximate SE tax deduction
• Deductible IRA amount is rounded to the nearest $10 per IRC §219(g)(2)
• Contributions entered through the Strategic Contributions strategy are not subject to IRA phaseout calculations
• Employer 401(k) contributions do not affect the employee contribution limit
• HSA requires high-deductible health plan (HDHP) enrollment

Limitations

• Does not model highly compensated employee (HCE) 401(k) contribution restrictions
• Does not include employer matching contributions (not an employee deduction)
• Assumes contributions are made within the calendar year (or by the tax filing deadline for IRAs)
• Does not model 401(k) after-tax contributions or mega backdoor Roth strategies
• MAGI for IRA phaseout is an approximation — IRA distributions are excluded from the estimate because they are calculated later in the projection pipeline; the deductible amount may be slightly overstated in years with significant IRA distributions
• Non-deductible IRA contributions create Form 8606 basis that reduces future distribution taxation; this basis is tracked in the projection model and affects the tax-deferred asset basis calculation

Related

• Federal Ordinary Income Tax — Retirement contributions reduce AGI, lowering ordinary income tax liability
• Roth Conversion Tax Impact — Deductible contributions to Traditional accounts create future tax liability when converted to Roth
• Qualified Business Income (QBI) Deduction — SEP/SIMPLE contributions reduce self-employment income, which affects QBI deduction
• FICA Taxes — 401(k) contributions reduce FICA taxes (both SS and Medicare), unlike IRA contributions