Roth IRA Contributions

• Roth IRA contributions cannot be deducted from your income on your tax return. The advantage to a Roth IRA over a traditional IRA is that the contributions and earnings will be withdrawn tax-free upon retirement because contributions are taxed as they enter the plan. This makes Roth IRAs appealing to people who are in a lower tax bracket now than they anticipate being in at retirement.
  
  

Traditional IRA Contributions

• For individuals who do not have an employer-sponsored plan, the full amount up to the contribution limit or the individual's adjusted gross income, whichever is lower, is deductible. For 2009, the limit was $5,000 for anyone younger than 50 years old and $6,000 for anyone older than 50. Someone who was 30 years old, had an adjusted gross income of $33,000, was not covered by an employer-sponsored plan at work and contributed $5,000 to his or her traditional IRA could deduct $5,000 on her tax return.
  
  

Effects of an Employer Sponsored Plan

• If you or your spouse has access to an employee-sponsored plan through work, your contribution may be reduced or eliminated completely depending on your filing status and income level. You are still allowed to make the same contributions as anyone else, but you may not be able to deduct all of it. For those who have access to a retirement plan through work, to claim the full deduction if you are single, your modified adjusted gross income must be less than $55,000. If you are married filing jointly, it must be below $89,000, and if you are married filing separately, it must be $0. If you are single and make between $55,000 and $65,000, married filing jointly and make between $89,000 and $109,000 or married filing separately and make between $0 and $10,000, your deduction will be reduced. If your spouse has a work-sponsored retirement plan, you file one joint return and if you make less than $166,000, you can take the full deduction, and if you make between $166,000 and $176,000, you can take a reduced deduction.
  
  

Calculating Your Reduced Deduction

• If you fall in the phaseout range of the deduction, you can use the following formula to calculate how much of your contribution you can deduct. C represents your contribution limit, M represents your modified adjusted income, H represents the higher limit of the phaseout range and L represents the lower limit of the phaseout range.
  
  Deduction = C * (H - M) / (H - L)
  
  For example, if you were married filing jointly, had access to a retirement plan at work, were 40 years old, and had a modified adjusted income of $99,000, you could deduct up to $2,500 of contributions to a traditional IRA.
  
  

Deducting Losses in an IRA

• In order to deduct a loss on an IRA, you must cash out all of your IRA accounts of the same type. For example, if you wanted to claim a loss on one of your traditional IRA accounts, you would have to close all of your traditional IRA accounts, whether or not they also has losses. This makes claiming the loss virtually impossible for anyone who has not yet reached the age of 59 1/2 because if you withdraw money early, you have to pay an additional 10 percent penalty. If you do decide to withdraw all of your contributions and earnings, you can only deduct the losses from nondeductible contributions. This must be an itemized deduction, and only the amount that exceeds 2 percent of your adjusted gross income can be deducted.