As April 15, tax day, looms, many individuals rush to squeak in an IRA contribution for the 2018 tax year. The tax-filing deadline is also the deadline for contributions to IRAs for the year prior; it’s also the HSA deadline.

One question that looms large this year, however, is whether changes to the tax code, which are expected to lead to many fewer taxpayers claiming itemized deductions versus claiming the standard deduction starting in 2018, affect the deductibility of those IRA contributions.

The short answer is no. Higher standard deduction amounts going into effect starting with the 2018 tax year are likely to make itemizing deductions much less profitable for many taxpayers than was the case in the past because taxpayers can use the higher of their standard deduction or their itemized deduction. At the same time, many of what used to be called “above-the-line” deductions, including contributions to IRAs, aren't changing a bit. (The above-the-line/below-the-line language is a vestige of a bygone era, however, in that the 1040 form has been completely redesigned for 2018.)

That means that regardless of whether they itemize their deductions or claim a standard deduction, taxpayers will still be able to deduct outlays like their IRA contributions (assuming their income falls under the thresholds here). Furthermore, contributions to SIMPLE and SEP IRAs are also deductible. In a similar vein, taxpayers will still be able to deduct their health savings account contributions if they're covered by a high deductible health care plan, as well as qualifying student loan interest, among other items. True, there are some tweaks to non-itemized ("above the line") deductions starting with the 2018 tax year, such as alimony, but much is staying the same. All such adjustments go on Schedule 1, which accompanies your 1040 form.

On the flip side, the deductions you itemize and include on Schedule A along with your tax return are the ones that are apt to be less beneficial for many households than was the case in the past, owing to the new higher standard deduction amounts. With taxpayers allowed to take the greater of their standard deduction or itemized deductions, the standard deduction is likely to win out even more frequently than it does today. Such deductions include items like charitable contributions, qualified medical expenses, and mortgage interest.

You Can Still Deduct It, But Should You?
For taxpayers who have earned income and their modified adjusted gross income falls below the IRS’ thresholds for deductibility of an IRA contribution, a related question comes into play. If you can contribute to a traditional IRA and deduct it on your tax return, by extension you can also contribute to a Roth IRA (i.e. the income limits are higher for eligible Roth IRA contributions than those imposed for deductibility of traditional IRA contributions). Which is the better bet?

As much as Roth IRAs have significant attractions, including tax-free withdrawals in retirement and no required minimum distributions, the right IRA contribution type depends on your own situation. The major swing factor is your tax rate at the time of the contribution versus your expected tax rate at the time of withdrawal. A higher tax rate at the time of contribution argues for making the deductible contribution, even if it means the money gets taxed upon withdrawal. After all, the tax break is more valuable to you at that time.

The opposite is also true: If your tax rate in retirement will be higher than when you made the contribution, you should favor Roth contributions, pocketing your tax break when you pull the money out. If your tax rate in retirement is the same as when you were working and made the contribution, the decision about whether to contribute to a traditional or Roth account is a wash.

For example, a person with a high income but a low savings rate may well be in a lower tax bracket when she retires than when she was working. After all, if she's no longer earning income from work and hasn't saved much for retirement, there's not much to tax when she begins withdrawing the money in retirement, nor will she be subject to large RMDs. For such a person, prioritizing deductible contributions is the way to go because she can at least earn a tax break at the time of contribution when she's still earning her high salary. If her tax bracket drops from 24% when she was working to 12% in retirement, she's better off paying the tax on the way out of her IRA, at the lower rate, than on the way in.

The opposite is also true: The heavy saver who doesn't have a high income from his job may well get a bigger bang from Roth contributions. Even if he's contributing after-tax dollars to his account, as is the case with his Roth contributions, he could be in a lower tax bracket at the time of contribution than he will be at the time of withdrawals in retirement. In short, he's better paying the tax toll on the way in than on the way out.

Of course, many investors likely have no idea how their tax rate at the time of contribution will compare with their taxes in retirement. For such investors, tax diversification--amassing assets in receptacles with varying tax treatments--is a valuable concept.