IRA Tax Deductions

It's possible to enjoy tax deductions by contributing to a traditional IRA, but Roth IRAs come with different tax benefits.

Written by Jacqueline DeMarco / August 22, 2022

Quick Bites

  • You can contribute to a traditional IRA with pre-tax income and deduct contributions from your federal income taxes.
  • With a Roth IRA you make contributions with post-tax income and don’t pay taxes on the earnings.
  • There are income limits that can influence if and how much you can contribute to IRAs.

While saving for retirement is always a good thing, workers can really benefit by putting their savings into an IRA (individual retirement account), which is a retirement account that makes it possible to invest savings and to save on income taxes either now or in the future.

Keep reading for detailed insight into how IRAs work and what types of tax benefits and deductions you can earn by contributing to an IRA.

Inside this article

  1. What’s an IRA?
  2. About tax deductions
  3. IRA tax deductions
  4. Roth IRA vs. IRA deductions
  5. Deductible IRA contributions
  6. Limits

What’s an IRA?

An IRA is a retirement savings vessel that makes it possible to invest your retirement savings while potentially saving money on your taxes.[1] You can only contribute a certain amount each year and that amount can change.

You can set up an IRA at a wide variety of financial institutions, including banks and credit unions. While you can use an IRA as a savings account, if you want your retirement savings to grow you need to place your contributions in an interest-bearing account or investment fund. You can choose between different investment options like stocks or mutual funds.

Understanding retirement accounts and tax deductions

The two most popular types of IRAs are traditional IRAs and Roth IRAs. Which type of retirement account you contribute to impacts the types of tax breaks you can potentially enjoy.

With a traditional IRA, you make contributions with pretax income. When you withdraw your contributions and any growth from the traditional IRA (ideally this will happen at retirement age), you will then pay income taxes on those funds. The idea behind this strategy is that you have more money to invest before retirement by not paying income taxes up front, but it’s also common to be in a lower tax bracket once you retire, which can help you save on income taxes.

A Roth IRA vs. a Traditional IRA

A Roth IRA vs. a Traditional IRA

Knowing the differences between these retirement savings accounts will help you plan whether one or both can help you meet your goals.

Find out more

With a Roth IRA you make contributions with post-tax income, but you can withdraw the growth tax-free as long as you do so at the right time. With both Roth and traditional IRAs, you need to wait until the age of 59½ (there are some exceptions to this rule) and meet other qualifications or you risk having to pay a 10% tax as a penalty for withdrawing early.

IRA tax deductions

“Contributions to Roth IRAs are NOT eligible for a tax deduction—period,” says Ernest Lacroix, financial advisor and founder of Achieve Financial Solutions. “Contributions to a traditional IRA are potentially eligible for a tax deduction. Factors that go into determining whether or not one is eligible for a tax deduction include tax filing status, adjusted gross income, and whether or not one is covered by an employer sponsored plan.”

“Contributions to a Roth IRA are made with after-tax dollars and grow on a tax-free basis, therefore no tax deduction is available," Lacroix says. "Contributions to Traditional IRAs are made with the potential of a tax deduction and grow on a tax-deferred basis.”

Roth IRA deductions vs. traditional IRA deductions?

Let’s take a closer look at what you need to know about IRA tax deductions.

Because traditional IRAs make it possible to save using pre-tax money (aka money you’ve yet to pay taxes on), you can deduct your annual contribution to your traditional IRA so you can avoid paying income tax on that money when you file your federal income tax return. Because you won’t pay income tax on that money when you make the contribution (aka you get a tax deduction), you need to pay income tax later. Because income levels drop drastically at retirement age, the hope is you’ll pay less income tax when you make your withdrawals.

How to Open a Roth IRA

How to Open a Roth IRA

It takes just a few simple steps to open a Roth IRA and start saving for retirement.

Find out more

When it comes to Roth IRAs you can’t make deductions on your federal income tax return as you use post-tax income to make contributions. When you get to benefit tax wise is when it comes time to withdraw your earnings as you won’t have to pay income tax on that growth.

So, how can someone decide whether they should be contributing to a traditional or Roth IRA?

“First, one should determine if they are even eligible to make a Roth IRA contribution,” Lacroix says. “Depending on your tax filing status and adjusted gross income, you may not be eligible.”

Assuming you are eligible to make a Roth IRA contribution, Lacroix then suggests considering where you are from a tax perspective. “

If you are in a low tax bracket, then it may make sense to pay the taxes now at a lower tax rate in exchange for the tax-free growth,” he says. “If you are in a high tax bracket now and you believe tax rates may be lower in the future, then you may want to consider taking the potential tax deduction now, assuming you are eligible, and paying the tax later at the assumed lower tax rate.”

Deductible IRA contributions

As briefly noted earlier, there are limits to how much you can contribute to a Roth or traditional IRA (for a traditional IRA this contribution will be how much you can deduct from your taxes). For 2022, it’s possible to contribute up to $6,000, but if you are age 50 or older you can contribute an additional $1,000 a year (this is known as a catch-up contribution) for a total contribution of $7,000.[2]

Limits due to income and other retirement accounts

If you or your spouse have access to an employer sponsored retirement plan through work and your income exceeds certain levels, your traditional IRA contribution deductions may be limited. Your income can also affect whether you can contribute to a Roth IRA.[3,4]

Let’s review the 2022 limits based on income and access to workplace retirement plans:

Traditional IRA Roth IRA
Single taxpayers covered by a workplace retirement plan: $68,000 to $78,000 Single taxpayers and heads of household: $129,000 to $144,000
Married couples filing jointly (when the spouse making the IRA contribution is covered by a workplace retirement plan): $109,000 to $129,000 Married, filing jointly: $204,000 to $214,000
A taxpayer not covered by a workplace retirement plan married to someone who's covered: $204,000 to $214,000 Married, filing separately: $0 to $10,000
Married filing a separate return (applies to taxpayers covered by a workplace retirement plan): $0 to $10,000
Article Sources
  1. “What Is an IRA?.” Experian. Jan. 22, 2020.,you%20pay%20on%20those%20funds.
  2. “Traditional and Roth IRAs.” IRS. Nov. 5, 2021.
  3. “Retirement Topics - IRA Contribution Limits.” IRS. Nov. 27, 2021.,taxable%20compensation%20for%20the%20year
  4. “IRS announces changes to retirement plans for 2022.” IRS. Nov. 17, 2021.

About the Author

Jacqueline DeMarco

Jacqueline DeMarco

Jacqueline has worked with more than two dozen financial brands, including LendingTree, Capital One, Bankrate, Student Loan Hero, and Northwestern Mutual, providing thoughtful content to give readers insight into complex topics that they likely didn’t learn in school.

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