Can I Contribute to an IRA to Lower Taxes?

Saving for retirement is essential to support your lifestyle when you retire, but it can also save you money on your income taxes. Certain types of retirement accounts, such as 401(k) plans and individual retirement accounts, offer tax benefits. Whether you stand to save on taxes by contributing to an IRA depends on your work benefits, your total income and the type of IRA.

IRA Basics

An IRA is a savings and investment plan that you open on your own, separate from employer-offered retirement plans. You can open IRAs with banks, credit unions, mutual fund companies and stock brokerages. There are two basic types of IRAs: traditional IRAs and Roth IRAs. Anyone with earned income who is younger than 70 1/2 can contribute to a traditional IRA, but contributions to traditional IRAs are only tax-deductible if you meet certain requirements. On the other hand, Roth IRAs do not offer deductible contributions; instead, you get a tax break later, after retirement, because you don't have to pay taxes on withdrawals from Roth IRAs. For both types of IRAs, the maximum annual contribution is $5,000 for workers under 50 or $6,000 for those aged 50 or older.

Tax-Deductible Contributions

Many employers offer tax-advantaged retirement plans to workers as a job benefit. If you don't have access to a retirement plan through an employer, your traditional IRA contributions are tax-deductible. If you do have access to a plan through an employer, your contributions are only deductible if your income falls below certain maximums. In 2012, traditional IRA contributions are fully deductible when you have access to a retirement plan through an employer if your adjusted gross income is $58,000 or less as a single filer and $92,000 or less as a married person filing a joint tax return. If your adjusted gross income is higher than these maximums, but less than $68,000 as a single filer or $112,000 as a joint filer, you are eligible for a partial deduction. If your adjusted gross income exceeds those amounts, you can still open a traditional IRA, but your contributions aren't tax-deductible.

Roth IRA Rules

With a Roth IRA, it doesn't matter whether you are covered by a retirement plan through an employer: the only thing that determines whether you can contribute is your adjusted gross income. You need to have an adjusted gross income that is less than $125,000 as a single taxpayer and less than $183,000 as a married taxpayer filing a joint return to contribute to a Roth IRA in 2012.

IRA Withdrawals

When you withdraw money from a traditional IRA, you may or may not owe tax depending on whether your contributions were tax-deductible and whether your account earned investment gains. Tax-deductible contributions and investment gains are subject to income taxes at the time of withdrawal from a traditional IRA, but nondeductible contributions are not subject to taxation. You don't have to pay taxes on Roth IRA withdrawals, even if you have investment gains.

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