Understanding Traditional IRA contributions and their tax benefits
A Traditional Individual Retirement Account (IRA) is a tax-advantaged retirement savings account that allows you to save money for retirement while potentially reducing your current tax burden. Think of it as a special savings account designed specifically for your retirement years.
The key benefit of a Traditional IRA is that your contributions may be tax-deductible, meaning you can reduce your taxable income for the year you make the contribution. This can lower your current tax bill and help you save more for retirement.
When you contribute to a Traditional IRA, you may be able to deduct that amount from your taxable income for the current year, reducing your tax bill.
Your money grows tax-free inside the IRA. You won't pay taxes on investment gains until you withdraw the money in retirement.
When you withdraw money in retirement, it's treated as ordinary income and taxed at your current tax rate at that time.
Starting at age 73, you must begin taking required minimum distributions (RMDs) from your Traditional IRA each year.
Your ability to deduct Traditional IRA contributions depends on your Modified Adjusted Gross Income (MAGI) and whether you or your spouse are covered by an employer retirement plan.
If you or your spouse are covered by an employer retirement plan (like a 401(k)), the deduction may be limited or eliminated based on your income.
| Filing Status | Full Deduction MAGI Limit | Phase-Out Range |
|---|---|---|
| Single or Head of Household | $77,000 or less | $77,001 - $87,000 |
| Married Filing Jointly | $123,000 or less | $123,001 - $143,000 |
| Married Filing Separately | $10,000 or less | $10,001 - $20,000 |
Note: If you're not covered by an employer retirement plan, you can deduct the full amount of your Traditional IRA contribution regardless of income.
You can open a Traditional IRA with:
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