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Q&A: "Will My Employer's SEP-IRA Contributions Affect How Much I Can Contribute to a Traditional IRA?"

Retirement Accounts Tax

Question and background: 

My employer opened up, and began contributing, to a SEP IRA for me in 2013. A) Will this contribution that my employer makes affect how much I can contribute to my traditional IRA? B) If I can contribute to the traditional IRA, what amount will be deductible on my 2013 taxes? For example, I am eligible to contribute $6,500 in my traditional IRA and the SEP IRA contribution that my employer made was $1,000.

Answer: 

A) Employer contributions made under a SEP-IRA don't affect the amount you can contribute to an IRA on your own behalf, so you're good on that front.

B) If you contribute $6,500 to your own Traditional IRA ($5,500 + $1,000 catch-up contribution for age 50+), the amount you can deduct against your 2013 income taxes will depend on your marital status, (if married) whether your spouse is covered under a retirement plan at work, and your Modified Adjusted Gross Income (MAGI). 

If you file your income taxes as Single or Head of Household, you can deduct your full 2013 Traditional IRA contribution if your income (MAGI) is $59,000 or less, since you have the SEP-IRA. Deductibility phases out between $59,000 and $69,000.

If you file Married Jointly, you can deduct your full 2013 Traditional IRA contribution if your income (MAGI) is $95,000 or less, since you have the SEP-IRA. Deductibility phases out between $95,000 and $115,000. 

For many people, Modified Adjusted Gross Income (MAGI) will be the same as their Adjusted Gross Income (AGI) at the bottom of page 1 of their federal tax return. However, MAGI is different from AGI in that it adds back a few items, such as student loan deductions, foreign income, foreign housing deductions, and so forth.

Hope that helps!