If you are saving for retirement, contributing to an IRA (Individual Retirement Account) allows your investments to grow and save money at tax time. Sounds great, doesn’t it? But, there are a few things to know about your IRA tax deduction to make sure you get the most benefit when you file your taxes.
#1: Only Traditional IRA contributions are Tax-Deductible
When you sign-up for an IRA, you have two different account types to choose from, Traditional or Roth. The first is funded with pre-tax income dollars like an employer 401k plan. Roth IRA’s, on the other hand, are funded after your income taxes have already been withheld, but you don’t pay a tax when you begin to withdraw in retirement.
With a traditional IRA, you can claim the amount you contributed to reduce your taxable income for the current tax year. This can be a good strategy if you might have to pay a tax penalty because enough wasn’t withheld through the year. By making a contribution, you might be able to get a refund or at least “break even.”