Using a Traditional IRA for the Tax Deduction?  You Might Want to Rethink That |  Personal Finance

Using a Traditional IRA for the Tax Deduction? You Might Want to Rethink That | Personal Finance

(Stefon Walters)

It’s always best to attack retirement saving from multiple angles. One way to do so is by using the multiple retirement accounts available to you, mainly because of their tax benefits. A 401(k) is the most popular type of retirement account, but it shouldn’t be your only retirement account. Both Roth and traditional IRAs can be a great source of retirement income, and their tax breaks make them worthwhile.

If you find yourself leaning toward a traditional IRA over a Roth IRA for the potential tax deduction, here’s why you might want to reconsider.

Traditional IRA deductions

For tax year 2022, the maximum amount you can contribute to an IRA (both Roth and traditional combined) is $6,000, or $7,000 if you’re 50 or older. What makes a traditional IRA lucrative is the fact your contributions may be tax deductible, depending on your filing status, income, and whether or not you’re covered by a retirement plan at work. if you are covered by a retirement plan at your job, here’s how much of your contributions you can deduct:

People are also reading…

  • FIJI, Kappa Alpha kicked off UVa Grounds
  • After friend’s death, Meredith Wells leaving JMU softball team for Elon
  • Opinion/Commentary: Jefferson fought slavery throughout his life
  • Art or ingots, Confederate statues’ fates await
  • County growth options elicit ‘polarizing’ feedback
  • UVA Medical School unlisted from last year’s US News & World Report ranking for reporting wrong information
  • Niko the dog euthanized in Albemarle County after yearslong court battle
  • Southwest Virginia flooding damages more than 100 homes; 40 people unaccounted for
  • Ivana Trump, first wife of former president, dies at 73
  • Opinion/Editorial: Frats don’t understand true bonding
  • Justice property to be auctioned off
  • Multiple dead at various California 7-Eleven stores, Prime Day, and more trending topics
  • O’Donnell leaves Northwestern to suit up for Virginia
  • Dad, not boy, was driving truck that hit golfers’ van in Texas, killing 9, NTSB says
  • With more students off the bus, parents call for safety improvements to city streets

Tax Filing Status Income Deduction Allowed
Single $68,000 or less Full amount
Single $60,801 to $77,999 partial amount
Single $78,000 or more No deduction allowed
Married, filing jointly $109,000 or less Full amount
Married, filing jointly $109,001 to $128,999 partial amount
Married, filing jointly $129,000 or more No deduction allowed
Married, filed separately Less than $10,000 partial amount
Married, filed separately $10,000 or more No deduction allowed

Image source: Getty Images.

If you are not covered by a retirement plan at your job, here’s how much you can deduct:

Tax Filing Status Income Deduction Allowed
Single any amount Full amount
Married, filing jointly or separately (with a spouse not covered by a work plan) any amount Full amount
Married, filing jointly (with a spouse that es covered by a work plan) $204,000 or less Full amount
Married, filing jointly (with a spouse that es covered by a work plan) $204,001 to $213,999 partial amount
Married, filing jointly (with a spouse that es covered by a work plan) $214,000 or more No deduction allowed
Married, filing separately (with a spouse that es covered by a work plan) Less than $10,000 partial amount
Married, filing separately (with a spouse that es covered by a work plan) $10,000 or more No deduction allowed

A traditional IRA is similar to a 401(k) in that contributions lower your present-day taxable income, but you’ll owe income taxes on any withdrawals made in retirement — which you will eventually have to do because traditional IRAs have required minimum distributions (RMDs) once you turn age 72.

The deduction may not be worth it

The main thing that separates a traditional IRA from a Roth IRA is when you receive your tax break. With the traditional IRA, the tax break is on the front end with the potential tax deduction. With a Roth IRA, you can’t deduct your contributions, but you can take tax-free withdrawals in retirement (beginning at age 59 1/2). Even if you’re eligible for the traditional IRA tax deduction, you may find you’re better off going with a Roth IRA and taking the tax-free withdrawals on the back end.

If you’re relatively early in your career and your tax bracket is likely to be higher when you retire, it makes sense to pay taxes now instead of later when it’ll cost you more. This is especially true when you consider how much investments can compound over time. If you make a one-time $6,000 investment in a Roth IRA and earn 10% annually, on average, for 25 years, you would have accumulated over $65,000. Since it’s in a Roth IRA, that entire amount could be withdrawn tax-free in retirement, easily saving you thousands in taxes. In a traditional IRA, there’s a chance the taxes you’d owe on that amount would offset the benefits you received from the tax deduction.

If you’re in your peak earning years and this is likely to be the highest tax bracket you’ll ever be in, it makes sense to take the tax break now when it’s more valuable. If that isn’t the case, the benefits from the possible deduction likely won’t outweigh the benefit of having your money grow and compound tax-free in a Roth IRA. You’ll never get out of paying taxes completely, but you can be strategic about when you pay them and how much it ultimately costs you.

10 stocks we like better than Walmart

When our award-winning analyst team has an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisoryou have tripled the market.*

They just revealed what they believe are the have best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

Stock Advisor returns as of 2/14/21

The Motley Fool has a disclosure policy.

.

Leave a Comment

Your email address will not be published.