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Consider two married individuals in the following scenario for 2017:

  • Married filing jointly with MAGI = $109,000
  • Both people are participants in an employee-sponsored plan
  • Both age 35
  • They both want to contribute to their individual, traditional IRA but realize they will only receive a partial deduction.

For 2017, that looks like exactly half of the $5,500 per individual is deductible. Do deductibility limits apply to the first $2,750 or 50% of IRA contribution up to $5,500? In other words, if they want to maximize deductions and minimize non-deductible contributions, do they each only need to contribute $2,750 each?

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The answer can be found in IRS Publication 590a, in Worksheet 1-2 ("Figuring Your Reduced IRA Deduction for 2016"). The worksheet results in you getting the $2750 number at step 4. At step 6 you enter your total IRA contributions. The crucial step is step 7:

IRA deduction. Compare lines 4, 5, and 6. Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040, 1040A, or 1040NR line for your IRA, whichever applies.

That means that if your contribution was greater than or equal to the deduction limit, you can deduct the full deduction limit (i.e., $2750), and if your contribution is less than the deduction limit, you can deduct the amount of your contribution. That is, it applies to the "first $2750".

(I'm skipping over line 5 here, which involves computing your allowable deduction if you have a self-employment retirement program, but the same logic should apply for that too.)

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    Dont you mean: "as long as your contribution was LESS than or equal to the deductible amount, you can deduct the full deductible amount" – mhoran_psprep May 27 '17 at 12:07
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    @mhoran_psprep: No, but I guess my wording was unclear. By "the deductible amount" I mean the limit on the deduction ($2750 in this situation). So what I mean is that as long as your total contribution is over the deductible limit, you can deduct the full limit (not the full amount of your contribution). This is in contrast to the percentage-based possibility mentioned in the question, where you would need to contribute $5500 to be able to deduct $2750. I edited the wording of my answer slightly. Is it more clear now? – BrenBarn May 27 '17 at 17:37

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