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How IRA Tax Deductions Work

        Money | Taxes

They're not as generous as the tax perks for contributing to a 401(k), but you may be eligible for tax benefits if you contribute to an IRA.
They're not as generous as the tax perks for contributing to a 401(k), but you may be eligible for tax benefits if you contribute to an IRA.
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They say a penny saved is a penny earned, but for a whole bunch of folks, saving still seems to be on the to-do list for later. According to the results of an online survey released by the Federal Reserve, 31 percent of the more than 4,100 Americans who responded said they currently had no money set aside for retirement purposes. That includes nearly 20 percent of respondents between the ages of 55 and 64. In other words, a significant portion of people nearing the traditional retirement age are going to have to keep working, whether they want to or not [source: Marte].

That's one reason why the U.S. government tries to incentivize retirement savings. That's right: Uncle Sam will — more or less — pay you to put some of your paycheck away for later in life, in the hope that you eventually have enough saved to ride out of your cubicle and off into the sunset when the time is right, bound for the nearest cruise ship or shuffleboard deck.

For many workers, a 401(k) is the primary method of saving cash for retirement. In the U.S., the Internal Revenue Service currently allows taxpayers to contribute — in addition to any contributions by your employer — up to $17,500 to a 401(k) plan (going up to $18,000 in 2015) without that money being immediately taxed [source: IRS].

For those workers who aren't fortunate enough to have an employer-sponsored retirement plan, or those who want to put away a little extra money in addition to their 401(k) contributions, an individual retirement account (IRA) is another way to go. While the feds aren't as generous with the incentives for an IRA as they are for a 401(k), the tax code does provide significant potential savings for those who qualify.

But before we get to that, let's take a look at exactly what an IRA is, and how it's different from other investment accounts.


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