There may be an IRA deduction on your U.S. federal income taxes, depending on the type of individual retirement account the investor has and how much has been contributed to it. However, using an IRA that has an up-front tax deduction may not be the best choice in all circumstances. It is up to the investor to understand the different types, how each one may affect him or her, and choose accordingly. That may include using the type of IRA that includes an IRA deduction.
For those who choose a traditional type of individual retirement account, an IRA deduction is possible. You may be able to deduct $2,000 US Dollars (USD) or more, depending on what the requirements are in the particular year you are filing, for contributions to a IRA. This type of IRA deduction will affect your adjusted gross income, thus lowering your tax burden by reducing the amount of taxable income you have.
However, there are cases when an IRA deduction may not be available, even with a traditional IRA product. This is dependent on a number of different circumstances including your filing status, income, and whether you are participating in an employer-sponsored retirement program. For those who feel this may be an issue, it is best to check with a tax preparer or financial planner.
Another popular type of IRA is referred to as the Roth IRA. In this type of account, there is no IRA deduction. However, this can have some special advantages as well. For example, the money gained and withdrawn from a Roth IRA is not subject to additional taxation, unlike the money from a traditional IRA. This has the potential to work to the financial benefit of an individual much more than a traditional IRA, which is why it has become so popular.
In essence, these two products allow the individual to choose when the tax burden will be applied. A traditional product, with an IRA deduction, means more taxes will be owed later. The Roth product, with no tax deduction available, means the tax burden will be paid up front, with assurances there will not be one later. This appeals to many when they retire because they know their incomes will be more limited.
As with most types of deductions, there may be other conditions associated with an IRA deduction. At the very least, the Internal Revenue Service (IRS) will often require proof of the contribution, which should be readily available to the investor. Therefore, the taxpayer should be certain to have all the documentation included when it comes time to file the taxes.