An individual retirement arrangement (IRA) provides a tax-beneficial way for a federal employee to set aside money for retirement. An IRA may be either an “individual retirement account” (IRA) which the IRA owner establishes with a financial services company (such as a bank, brokerage firm or mutual fund company), or an individual retirement annuity that is available through an insurance company. IRAs can be categorized into two types – a traditional IRA (“deductible” and “nondeductible”) and a Roth IRA.
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IRA Contribution Requirements
The one requirement for a federal employee to contribute to any IRA for a particular year is that the employee (and/or a spouse if married) must have some type of earned income during that year. Earned income includes: (1) Wages or salary; (2) Commissions; (3) Self-employment net income; (4) Alimony (but only with respect to divorce and separate instruments executed before January 1, 2019); (5) Nontaxable combat pay; and (6) Taxable non-tuition fellowship stipend payments.
Federal employees will receive from their agencies sometime during January 2026 their 2025 W-2 (Wage and Tax Statement). The 2025 W-2 statement shows the amount of compensation (salary) the employee earned during 2025. All employees are therefore eligible to contribute to an IRA for calendar year 2021. The deadline for making 2025 IRA contributions is the 2025 federal income tax filing deadline of April 15, 2026. Note that the April 15, 2026 IRA contribution deadline applies even if an individual requests a 2025 federal income tax extension to October 15, 2026.
IRA Contribution Limits
The 2025 IRA contribution limits are:
(1) If an employee is under age 50 throughout 2025, the lower of $7,000 or the employee’s earned income (salary/wages) or $7,000; and
(2) If an employee is age 50 or older as of 12/31/2025, the lower of the employee’s earn three types of IRA, namely:
1 – Deductible traditional IRA;
2 – Nondeductible traditional IRA; and a
3 – Roth IRA. What type of IRA an individual is eligible to contribute to comes down to two questions:
(a) Is the individual covered by an employer-sponsored defined benefit plan (such as a CSRS or a FERS annuity) or participating in an employer-sponsored defined contribution plan) (such as a 401(k), 403(b) or Thrift Savings Plan); and
(b) the individual’s modified adjusted gross income (MAGI). Since all permanent federal employees are covered by either the Civil Service Retirement System (CSRS) or the Federal Employment Retirement System (FERS), the issue of what type of IRA a federal employee can contribute to for the year 2025 is based on an employee’s 2025 MAGI.
In addition to receiving their 2025 W-2 statements during January 2026, employees will also be receiving other income statements for 2025 (including forms 1099-INT, 1099-DIV, 1099-B, 1099-MISC, and 1099-NEC). This means that by early to mid-February most employees will know the amount of their 2025 adjusted gross income and therefore will be able to determine their MAGI. At that point they know what type of IRA they are eligible to contribute to for the year 2025.
Deductible Traditional IRA Contributions
If an individual is covered by and participates in an employer-sponsored retirement plan, then the individual may not be eligible to deduct on their federal income tax return (as an adjustment to income) some or all of their traditional IRA contribution. The deductible amount begins to decrease (“phase out”) when the individual’s MAGI is above a minimum amount (“lower threshold”) and eliminated altogether when MAGI is above the maximum amount (“upper threshold”). Table 1 below summarizes the deductibility of traditional IRA contributions for individuals (or spouses) covered by an employer-sponsored retirement plan during 2025. Note that all permanent federal employees are covered by a retirement plan (either CSRS or FERS, and all permanent employees are eligible to contribute to the Thrift Savings Plan). Table 1 applies to federal employees who are considering making contributions to a traditional IRA for the year 2025. When employees receive their 2025 W-2 statement in January, they should note in box 13 (Retirement Plan) of their 2025 Form W-2 will be an “X”. The “X” means that the employee was covered by and participated in an employer-sponsored retirement plan during 2025.
Table 1. Deductibility of IRA Contributions-Individual (or Spouse) Covered by An Employer Retirement Plan* (2025)
*As shown on employee’s W-2 Statement Box 13 (with a “X” in the box)
**Modified AGI is calculated by adding back certain deduction and exclusion items to the individual’s AGI.
***Employees whose MAGI is within the “phase-out” (partial deduction) range should use the deduction worksheet for traditional IRA contributions found in IRS Publication 590-A.
The following example illustrates:
Thomas is a federal employee and married to Julie. They are both 40 years old. Julie is employed part-time in private industry and is not covered by a retirement plan. Their combined MAGI for 2025 is $133,000. Thomas’ salary is $59,000 and he contributed $7,000 to his traditional IRA for 2025. Since Thomas’ and Julie’s MAGI is between $126,000 and $146,000 and Thomas is covered by a retirement plan (FERS), Thomas’ traditional IRA contributions are subject to the deduction phase-out shown in the following worksheet from IRS
Publication 590-A:
Thomas can each deduct up to $4,550 of his 2025 $7,000 traditional IRA contribution. The amount that Tom cannot deduct ($2,450) is considered a nondeductible traditional IRA contribution.
Nondeductible Traditional IRA Contributions
Any individual who has earned income (or married and the individual’s spouse has earned income) is eligible to contribute the maximum amount to a nondeductible traditional IRA. It makes no difference with respect to the individual’s age or MAGI; the individual is allowed to contribute the maximum amount allowed for that year to a traditional nondeductible IRA. This means that all federal employees (and spouses) are eligible to contribute the maximum possible to a nondeductible traditional IRA for the year 2025. Also, as a result of the passage of the SECURE Act in December 2019, effective January 1,2020 all individuals with earned income are eligible to contribute to a nondeductible traditional IRA (assuming they or their spouse has earned income). Prior to January 1, 2020, once an individual reached the year he or she became 70.5, the individual was no longer eligible to contribute to a traditional IRA (deductible or nondeductible).
Reporting Nondeductible Traditional IRA Contributions
IRS Form 8606 (Nondeductible IRAs) must be filed to designate traditional contributions as nondeductible. Individuals do not have to designate a contribution as nondeductible until they file their current year tax return. This means that federal employees who make contributions to a nondeductible traditional IRA for the year 2025 must include as part of their 2025 federal income tax return IRS Form 8606) in which they will report the amount of their 2025 contribution to a traditional IRA.
Because nondeductible traditional IRA contributions are made with after-taxed dollars, the traditional owner establishes a cost basis in their traditional IRA. In establishing a cost basis, the IRA owner will not be taxed on the entire amount of the traditional IRA when the IRA is distributed. When the nondeductible traditional IRA is withdrawn, only the accrued earnings will be subject to federal and state income taxes. This is because since the contributions were made with after-taxed dollars (as reposted on Form 8606), the contribution will not be taxed again. Federal employees should be aware that for any year in which a nondeductible IRA contribution is made, the contribution is reported on Form 8606. Form 8606 is filed as part of that year’s federal income tax return.
Roth IRAs
A Roth IRA is an individual retirement account in which contributions are always nondeductible. Like traditional IRAs, Roth IRAs accrue earnings. The difference between traditional IRAs and Roth IRAs is with respect to withdrawals. With a traditional IRA, at least the accrued earnings portion of the IRA will be taxable when withdrawn. With a Roth IRA, all qualified withdrawals will be tax-free, including the accrued earnings. A qualified Roth IRA withdrawal means that the Roth IRA owner has met two requirements, namely: (1) At the time of withdrawal, the Roth IRA owner is at least age 59.5; and (2) It has been at least five years since January 1 of the year the Roth IRA owner made his or her first Roth IRA contribution.
The Roth IRA has no minimum or maximum age contribution restrictions. There are no other retirement plan participation restrictions or rules. But there are annual modified adjusted gross income (MAGI) limitations for making Roth IRA contributions. The 2025 MAGI limitations are presented in Table 2:
Table 2. Roth IRA Contribution Phase-Out (2025)
Summary of the Major Differences Between IRAs
The following table presents a summary of the major differences between a deductible traditional IRA, a nondeductible traditional IRA, and a Roth IRA.
IRA Contribution Deadlines
Federal employees are reminded that the deadline for making their 2025 IRA contributions is April 15, 2026. Those employees who make their 2025 contributions are advised to confirm with their IRA custodians that their contributions are for the year 2025. This is because the contributions are being made in calendar year 2026 and the IRA custodian may mistakenly categorize the contribution as a 2026 IRA contribution.