While you can deduct contributions made to a traditional IRA or to a 401k from your income, you cannot claim the amount you contributed to a Roth IRA as a deduction. Depending on how much you expect to pay in taxes when you retire, not deducting the contributions now can be more beneficial.
When you contribute to a Roth IRA, you are pre-paying the tax on the amount in the account and any money it earns over the years. Earnings on a Roth IRA are not taxed, as long as you leave them in the account for five years and wait until you are 59 1/2 years old to withdraw any earnings. There are some exceptions to the rule as well. If you withdraw money to pay for a house or school, you will not have to pay tax, even if you are under 59 1/2 years of age.
Getting a Tax Credit
There is a way to shave money off of your tax bill by contributing to a Roth IRA. If you earn less than $27,550 and are single, or less than $55,500 and are married filing jointly, you can claim the Saver's Credit on your Form 1040. The Saver's Credit gives you a tax credit of up to $1,000, meaning you will pay up to $1,000 less in taxes. The amount of the credit depends on your income and how much you contributed to a retirement plan in the previous tax year.
Limits of the Roth IRA
You can contribute to a Roth IRA if you earn less than $120,000 per year if you are single or less than $177,000 if married and filing jointly. Like the traditional IRA, the maximum yearly amount you can contribute is $5,000, unless you are over 50, in which case you can contribute $6,000. If you earn less than $5,000 per year, you can only contribute the amount you earn. Only the first $2,000 of your contribution is eligible for the Saver's Credit.
Unlike a traditional IRA, you don't have to start taking distributions from your Roth IRA at age 70 1/2 and can continue to put money into as long as you live. Although you need to have earned income to contribute to an IRA, you can also contribute to the IRA of your non-working spouse, even if he doesn't earn any income on his own.
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