Who can make a fully deductible contribution to a traditional IRA?

Who can make a fully deductible contribution to a traditional IRA?

• A. An individual with a retirement plan
• B. An individual with no earned income
• C. An individual under 18 years old
• D. An individual not covered by an employee-sponsored plan who has earned income

Answer: (D)

The reasoning behind the answer lies in the rules governing traditional IRA contributions. An individual not covered by an employee-sponsored plan who has earned income can make a fully deductible contribution to a traditional IRA because their income is not affected by the limitations that apply to those who are covered by such plans. For individuals who participate in an employer-sponsored retirement plan, the deductibility of their IRA contributions can be phased out at certain income levels. However, for those who are not covered by any such plan, as long as they have earned income, they can fully deduct their contributions from their taxable income, allowing for a more advantageous tax situation. This highlights the significance of having earned income as a prerequisite for contributing to an IRA. Individuals with no earned income cannot contribute, and minors typically fall into different tax and income provisions that may restrict their ability to make such contributions. Being covered by a retirement plan creates additional rules that may limit the deductibility of contributions, further emphasizing why the correctly identified option is advantageous for tax planning purposes.

The reasoning behind the answer lies in the rules governing traditional IRA contributions. An individual not covered by an employee-sponsored plan who has earned income can make a fully deductible contribution to a traditional IRA because their income is not affected by the limitations that apply to those who are covered by such plans.

For individuals who participate in an employer-sponsored retirement plan, the deductibility of their IRA contributions can be phased out at certain income levels. However, for those who are not covered by any such plan, as long as they have earned income, they can fully deduct their contributions from their taxable income, allowing for a more advantageous tax situation.

This highlights the significance of having earned income as a prerequisite for contributing to an IRA. Individuals with no earned income cannot contribute, and minors typically fall into different tax and income provisions that may restrict their ability to make such contributions. Being covered by a retirement plan creates additional rules that may limit the deductibility of contributions, further emphasizing why the correctly identified option is advantageous for tax planning purposes.