Traditional individual retirement accounts (IRAs) offer people the ability to save money for retirement on a tax-deferred basis. If you cannot contribute to an employer plan, any contribution you make to a traditional IRA is tax-deductible. If you are covered, you may not be able to deduct your contributions. Taking a deduction for your traditional IRA contribution reduces your taxable income, which in turn lowers your taxes. The amount you will save depends on your income tax bracket as the greater your tax rate, the greater the savings.
1. Compare your modified adjusted gross income (MAGI) to the annual limits if you or your spouse has access to an employer provided retirement plan. These limits apply even if you do not make a contribution to the plan. If your MAGI is too high, you cannot deduct your contribution, and therefore cannot reduce your taxes with a contribution. If you do not have an employer plan, you can deduct your contribution regardless of income.
2. Make a contribution to a traditional IRA for up to the maximum annual contribution. The more that you contribute, the more you will save on your taxes, as long as you do not exceed your annual limit. You can also open up a Roth IRA. A Roth IRA is subject to the rules that apply to a traditional IRA, however, you can make contributions to your Roth IRA after you reach age 70 1/2, and qualified distributions can be tax free. However, you can’t deduct Roth contributions.
3. File your income taxes with Form 1040 or Form 1040A. Filing with Form 1040EZ does not allow you to claim a deduction for your traditional IRA contribution.
4. Report your traditional IRA contribution on line 17 if you use Form 1040A or line 32 if you use Form 1040. Since the deduction is an adjustment to income, you do not have to itemize or forgo the standard deduction.
Items you will need
- Form 1040 or 1040A
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