Federal and State IRA Tax Deduction
Individual Retirement Arrangements, or IRAs, are tax-advantaged accounts that encourage Americans to save money to help provide for their own support in retirement. The IRA was first introduced in 1974 with the Employee Retirement Income Security Act. Originally, Congress designed the IRA to benefit wage earners who were not covered by workplace pension plans. Over the years, Congress has expanded and modified the IRA, allowing for a number of ways for workers to reduce their overall tax bill.
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Federal Tax Treatment of IRA Contributions
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Workers who meet certain eligibility requirements may generally deduct up to $5,000 per year in contributions to a traditional IRA per year. Investors over age 50 may usually deduct another $1,000 per year. The IRS limits your ability to take deductions on contributions based on whether you are also covered by a workplace pension plan, 401k plan, 403b plan or similar arrangement, by income and by filing status. However, investors who do not qualify to take deductions on contributions due to income limitations may still make nondeductible contributions to traditional IRAs.
Roth IRA Contributions
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The Roth IRA, introduced in 1998 with the Tax Relief Act, takes the opposite approach. Roth IRA contributions are never deductible. Instead, the investor gets to take the money out in retirement, tax free. There are no required minimum distributions in retirement, either: Assets in Roth IRAs can grow tax-free, indefinitely.
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State Law and IRA Contributions
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Not every state charges an income tax. Those states that do have a state income tax usually also allow you to deduct contributions to IRAs for the purposes of calculating your taxable income and assessing your state income tax. You can generally note the deduction on your state tax return. There are some exceptions, however, such as New Jersey. For specific information about your state, visit the link in Resources.
State Tax Exemptions
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Some states, such as Pennsylvania, also exclude IRA distributions from income for the purposes of computing state income tax liability.
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