Tax Benefit of an IRA

Using an Individual Retirement Account (IRA) to save for retirement results in significant tax benefits over putting aside money in nonqualified accounts. Some benefits apply to all IRAs, while others are unique to either the traditional IRA or Roth IRA.

Tax-Sheltered Status

All IRAs are tax-sheltered accounts, which means that until you withdraw money from the IRA, you are not responsible for paying taxes on any of the earnings.

Tax Deductions

If you make a contribution to a traditional IRA, you are allowed to deduct the amount of the contribution from your income in the year that you make it, reducing the amount of tax you owe that year.

Tax-Free Retirement Income

Contributions to a Roth IRA are allowed to be withdrawn tax-free at retirement as long as the account has been open for at least five years. This can result in significant savings at retirement.

Savers Credit

If your adjusted gross income is below the annual limit, you may be eligible to take the Savers Tax Credit for contributions to either type of IRA. The credit is determined as a percentage of your total contribution if you qualify. For 2009, the limits are $26,500 for single filers, $39,750 for heads of household and $53,000 for joint filers.

Claiming the Savers Credit

To claim the Savers Credit, you must complete form 8880, available from the IRS website, and attach it to your tax return. Your tax return must be either form 1040 or 1040A; you cannot use form 1040 EZ if you claim the Savers Credit.

References

• IRS IRA Rules
• IRS: Get Credit for Retirement Savings Contributions

Resources

• Form 8880