Summary of IRA Deductions

If you are currently in a high tax bracket but foresee being in a lower one after you retire, you may benefit from a traditional IRA, because your withdrawals will be taxed at your lower rate in retirement. Many retirees fall to a lower tax bracket after they stop working, and this can save them on taxes.

However, not all contributions to a traditional IRA are deductible. Deductibility depends on whether you or your spouse is covered by an employer-sponsored retirement plan. If you or your spouse is covered by another retirement plan, this limits your contributions depending upon your adjusted gross income as calculated on your income tax return.

Even if your deductible contributions are limited by your adjusted gross income, you may still make a non-deductible contribution up to the maximum contribution allowed by law each year.

Withdrawals from a traditional IRA are taxed as ordinary income after age 59½. You may recover non-deductible contributions tax-free since you already paid tax on that money in the year you contributed it; but earnings on those contributions are taxed, as they did enjoy tax-free growth in the traditional IRA.

If you expect that you will be in as high or higher a tax bracket in retirement as you are now, you might consider the Roth IRA as an alternative to the traditional IRA.