For 2010, you’re allowed to contribute up to a maximum of $5,000 ($6,000 if you’re age 50 or older) to a traditional IRA. In some cases, though, you may not be able to deduct all of your contributions on your tax return.
If you’re an active participant in a company plan, the traditional IRA deduction begins to phase out when your modified adjusted gross income (MAGI) reaches $55,000 on a single return ($89,000 for those filing a joint return) and is phased out completely when your income exceeds $66,000 on a single return ($109,000 for those filing a joint return). This means that you can’t deduct your traditional IRA contribution at all if your MAGI exceeds $66,000 on a single return or $109,000 on a joint return.
Although you may not receive a deduction for your traditional IRA contribution, you can still contribute to your traditional IRA if you otherwise qualify. This is called a nondeductible IRA contribution. If you make nondeductible contributions to a traditional IRA, you must complete Form 8606 and file it with your return.
This form helps you keep track of your basis in the account. Basis includes the total amount of nondeductible contributions that you make. This is important because it will keep you from paying tax on the money a second time when you withdraw it.