IRA Tax Deduction

Are You Using an IRA Tax Deduction On Your Tax Return?

Each type of IRA works a little different, in terms of tax deductions that are allowed. A Roth IRA is one in which contributions are made from assets that have already been taxed, and in which withdrawals upon retirement are generally not taxed. A traditional IRA is one in which contributions are made from assets that have not been taxed, in order to receive an IRA tax deduction for that year. These funds are then taxed as income when the account owner reaches retirement age and begins withdrawing their money. There are additional types of IRA accounts, but these two are the most common. 

So what does all of this mean in terms of taking an IRA tax deduction on your return for the current year? If you want to be able to deduct your IRA contributions from your taxes this year, you'll have to be making contributions to a traditional IRA. Because contributions to Roth IRAs are pre-taxed, they do not qualify for tax deductions now - but will be tax free later. What this means for the average IRA account holder is deciding which account type offers the most benefits for their individual situations. 

For example, IRA owners who seem to end up owing money to the IRS every year might benefit from being able to reduce this amount through the tax deductions allowed by a traditional IRA. But an IRA owner who usually receives a tax refund, or who at least never owes money to the IRS, might find the tax-free, penalties-free withdrawals of a Roth IRA to be preferable to receiving a tax deduction each year. Again, it depends on the owner's unique financial situation.   

As you make plans for completing your income tax return this year, and aren't sure what type of IRA would be ideal for your situation, talk the issue over with your financial advisor. He or she will be able to help you decide if taking advantage of an IRA tax deduction would be right for your financial situation.