Yes, most IRA tax deductions allow you to reduce your taxable income dollar for dollar by the amount you contribute to a qualifying IRA. You can claim this deduction on your federal tax return, potentially lowering the taxes you owe. However, IRA tax deduction rules vary based on which type of IRA you have and your specific financial situation. For instance, while traditional IRA contributions can be tax deductible, Roth IRA contributions are not
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Roth IRA contributions give you tax-free benefits in retirement but aren't tax deductible today because they're made with after-tax dollars. Instead, Roth IRA tax benefits can include tax-free growth, tax-free withdrawals in retirement, and no required minimum distributions (RMDs).
Roth IRA contribution limits depend on your filing status and modified adjusted gross income (MAGI).
Traditional IRA contributions may be tax deductible, but it depends on your MAGI, filing status, and whether you or your spouse are covered by a workplace retirement plan.
If you (or your spouse, if applicable) aren't covered by an employer retirement plan, your traditional IRA contributions are fully tax deductible.
If you (or your spouse, if applicable) are covered by an employer retirement plan, you can still make contributions to a traditional IRA, but depending on your income, they may qualify as partially deductible or totally nondeductible IRA contributions.
If you aren't covered by a retirement plan at work, your deductions are as follows:
If you are covered by a retirement plan at work, your deductions are as follows:
| IRA contribution limits, 2024 and 2025 | ||
|---|---|---|
| Year | Under age 50 | Age 50 and older |
| 2024 | $7,000 | $8,000 |
| 2025 | $7,000 | $8,000 |
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The limits on the amount you can deduct don't affect the annual amount you can contribute. However, you can never claim a tax deduction for more than what you contributed to your IRA that year.
Keep in mind that whether or not your contribution is tax deductible shouldn't be the only consideration in choosing an IRA. Before deciding, you should also weigh factors like RMDs, legacy goals, liquidity needs, future income projections, and taxes on withdrawals.
For self-employed individuals, business owners, or those earning freelance income, you can contribute to a Simplified Employee Pension IRA (SEP-IRA). Contributions to a SEP-IRA are tax deductible up to the contribution limit.
Yearly SEP-IRA contribution limits differ from traditional and Roth IRAs, and are the lesser of:
Your tax-deduction savings will depend on several factors:
If you can't make tax-deductible contributions to a traditional IRA, you have several other retirement savings options:
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Withdrawals from a Roth IRA are generally tax-free if you are over age 59½ and have held the account for at least five years; withdrawals of earnings taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made.)
The information contained herein does not constitute tax advice, and cannot be used by any person to avoid tax penalties that may be imposed under the Internal Revenue Code. Each person should consult an independent tax advisor about their individual situation.
Taxes: You can only use your HSA for medical costs that are covered. Otherwise, you may have to pay income tax on the money you take out. And if you're under age 65, you may also face a 20% federal penalty tax.