What Are the Rules For IRA Deductions on Taxes?
The choice between a retirement plan offered through an employer or taking out your own traditional IRA can be a tough one to make. The perk to going with your own IRA account is the IRA deduction on your taxes that comes at the end of the year. But, are you sure what you contribute will really be eligible for your IRA deductions?
There are rules that govern who is eligible for the tax deduction at the end of the year. The biggest guiding factor is whether or not you also participate in other types of retirement plans offered through your employer. If you do contribute to an employer’s plan, you will not be eligible for the deduction on your contributions to a traditional IRA.
The only way to qualify for full IRA deductions on your taxes for every dime you contribute throughout the year is to pass up any other retirement plans offered from your employer. You are then considered a non-participant and will be entitled to full deduction benefits.
When you choose to participate in a retirement plan through your work, you give up your right to tax deductible contributions in your traditional IRA. You may want to consider going with a Roth IRA instead if this is the case, since the real perk to going with the traditional plan is the deduction.
Roth IRA plans are set up differently and do not offer tax deductible contributions. They also have some limiting factors as those in the higher brackets of income will eventually phase out. They can eventually be ineligible to contribute at all if their income becomes too high. Make sure to keep in mind that there are certain IRA withdrawal rules that apply differently based on you choice of Roth or traditional IRA.
If you do qualify for the tax IRA deductions through a traditional IRA plan, you will eventually be given back your invested money through your tax filings. This makes it the best way to invest your money for retirement if you do not want to contribute to an employer-offered plan as well. IRA withdrawal rules state that you must be 59 1/2 prior to taking your money, though there are some exceptions.
To determine the most profitable situation for your contributions, you have to weigh the returns of an employer-offered plan to the benefits of the tax deduction.
When evaluating your Roth and traditional IRA choices you’ll want to consider whether immediate IRA deductions are more important to you or tax free withdrawal in retirement. In either case it’s always important to follow the IRA withdrawal rules before making taking payments, as there are often repercussions.
