Taking the IRA Deduction on Taxes

Do you know if you will really qualify for the tax IRA deduction that makes a traditional IRA plan so beneficial? This deduction is what attracts most investors to the traditional plan, but you have to know for sure that you will qualify for this perk.

The guiding rules that determine who will be eligible for the IRA deduction and who will not ultimately come down to other types of investment accounts you may hold. If you participate in a plan for retirement through your employer, then you will likely be ineligible for the tax deduction on your traditional IRA.

In order to be considered a "non-participant" and find yourself eligible for the beneficial deduction, you have to pass up all other opportunities for retirement plans through your employer. Once you sign up for these other investment plans, you give up your eligibility for the deduction.

You will still be allowed to contribute to your traditional IRA if you also contribute to an employer plan, but those contributions will not be tax deductible. Since this deduction is the big selling point for going with a traditional IRA, many people who also participate in employer plans choose to invest in a Roth IRA instead.

The set up for a Roth IRA is quite different from the traditional plan. Your contributions are not tax deductible and you are held to income limits which restrict how much you can contribute in any given year. Depending on your tax filing status and how much money you make each year, you may even phase out and be ineligible to contribute at all.

Many people still consider the traditional IRA the best way to invest for retirement savings, as long as you do not contribute to employer-offered plans as well. This is because you will eventually be handed your money back when filing taxes.

While the traditional IRA offers the IRA deduction the Roth IRA offers the benefits of tax free income. To decide whether you want to invest in a traditional or Roth IRA, you have to weigh the deduction benefit against the benefits of the plan your employer offers.