Retirement plans, specifically IRAs, offer many advantages other than just saving for your golden years. These include tax deductions and tax credits. It’s crucial to know how these work and any limitations placed on them.
Often, contributions to your traditional IRA are tax-deductible. However, if you participate in a SEP IRA, SIMPLE IRA or qualified plan, the deductability of your contributions would be determined by your modified adjusted gross income (MAGI) and your tax filing status. If it is not deductible, you can still make a non-deductible IRA contribution. You may also contribute to a Roth IRA provided you are eligible to. For the full deduction, the limit for a single filer is $110,000 and $183,000 for a married couple.
Splitting your contribution between both a traditional and Roth IRA may make sense as well. If you may only take a partial deduction to a traditional IRA, it makes sense to contribute the rest into a Roth since earning grow tax free there (as opposed to tax-deferred in a traditional IRA). On the other hand, if you’re entitled to only a partial Roth contribution, you should contribute to a traditional IRA to max out your IRA contributions for the year ($5,000 if under age 50 and $6,000 if 50 or older for 2012).
Finally, you may receive a non-refundable tax credit of up to 50% of your contribution (not to exceed $1,000). Here are the limitations:
|Credit Rate||Married and files a joint return||Files as head of household||Other category of filers|
|50%||Up to $34,000||Up to $25,500||Up to $17,000|
|20%||$34,000 – $36,500||$25,500 – $27,375||$17,000 – $18,250|
|10%||$36,500 – $56,500||$27,375 – $42,375||$18,250 – $28,250|
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