If you are covered by a retirement plan (qualified pension, profit-sharing plan, 401(k), annuity, SEP, SIMPLE) at work or through self-employment, you can still have an IRA and make contributions, but the amount you can contribute tax-free is gradually reduced, or phased out, when your modified adjusted gross income is over a certain amount. This amount depends on whether your filing status is married filing jointly or qualifying widower, single or head of household, or married filing separately.
You figure your modified adjusted gross income by taking your adjusted gross income and adding back the following adjustments:
IRA deduction
Student loan interest deduction
Tuition and fees deduction
Foreign earned income exclusion and housing exclusion or deduction
Exclusion of qualified savings bond interest on Form 8815
Exclusion of employer-provided adoption benefits on Form 8839.
If you are covered by another retirement plan, and you know your filing status and modified adjusted gross income, you can determine whether you can claim a full or partial IRA deduction by referring to the tables in IRS Publication 590, Individual Retirement Arrangements (IRAs). If you can claim a partial deduction, you can use the Worksheet in the same publication to determine the amount you can deduct.
Reporting Non-Deductible Contributions
You can contribute the full amount allowable to your IRA under the general limit or the spousal limit, even though you can only deduct part of it or none of it for income tax purposes. The difference is a non-deductible contribution and must be reported on Form 8606, Nondeductible IRAs. You have to file Form 8606 even if you do not otherwise have to file an income tax return.
If you do not file Form 8606 to report your non-deductible contributions, all your contributions will be treated as deductible and all distributions will be taxable. You can choose to report contributions as non-deductible, even though they are deductible. By making non-deductible contributions, you have a cost basis in your IRA. Then, when distributions are subsequently made, part of the distribution would be taxable and part would be non-taxable, as a return of cost.