IRAs

Deducting an IRA Contribution on Your Tax Return

If you have a workplace retirement plan, you can still stash money in an IRA. You can even take a deduction for a traditional IRA contribution if your income is low enough.

Question: My son, who is 23 years old and single, contributed the maximum $18,000 to his Roth 401(k) at work in 2016. His employer matched $9,000. Can he also make a tax-deductible contribution to an IRA?

Even if your son is eligible to deduct traditional IRA contributions, he may want to contribute to a Roth IRA instead. He can’t deduct Roth IRA contributions (his Roth 401(k) contributions are also after taxes), but the money grows tax-free for retirement, and he can withdraw his contributions without penalty or taxes at any age. Because he's young and his income is likely to increase over time, pushing him into a higher tax bracket, the benefit of tax-free growth in the Roth IRA is likely to beat out the benefit of receiving a tax deduction for traditional IRA contributions now.

"Our studies have shown that, especially for younger investors, the Roth results in significantly more after-tax money during retirement than a traditional IRA," says Keith McGurrin, a certified financial planner with T. Rowe Price. "It is also true that if tax rates increase in the future, the Roth will be beneficial." Plus, Roths have no required minimum distributions after you turn 70 ½.

You can contribute the full $5,500 to a Roth IRA for 2016 if your modified adjusted gross income was less than $117,000 if single, or $184,000 if married filing jointly. The amount you may contribute gradually phases out until your income reaches $132,000 if single, or $194,000 if married filing jointly (the income limits increase slightly for 2017 contributions -- see What You Need to Know About Making IRA and 401(k) Contributions in 2017). For more information about the benefits of a Roth IRA and how to get started, see Why You Need a Roth IRA.

Most Popular

Thinking of Buying an RV or Motor Home? Think Again!
personal finance

Thinking of Buying an RV or Motor Home? Think Again!

A Lemon Law attorney has some insights on the downsides of RV ownership you should think about before putting your money down and hitting the road.
May 16, 2021
Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 17, 2021
2021 Child Tax Credit Calculator
Tax Breaks

2021 Child Tax Credit Calculator

See how much money you'll get in advance under the new child tax credit rules for 2021. Payments will start July 15.
May 17, 2021

Recommended

Today is the Last Day to Fund Your IRA and Cut Your Taxes
Tax Breaks

Today is the Last Day to Fund Your IRA and Cut Your Taxes

Although you need to act quickly, you still have a few hours to make a 2020 IRA contribution and lower your tax bill.
May 17, 2021
9 Tax Deadlines for May 17 (Today Isn't Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (Today Isn't Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by today's tax deadline than just filing y…
May 17, 2021
8 Money-Smart Ways to Spend Your Tax Refund
Tax Breaks

8 Money-Smart Ways to Spend Your Tax Refund

Since this year's tax deadline was pushed back to May 17, many people are just now filing their tax return. That means there are a lot of tax refunds …
May 10, 2021
Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
May 3, 2021