What are Retirement Contribution Deductions?
Retirement contribution deductions allow individuals to reduce their taxable income by the amount they contribute to eligible retirement accounts. These contributions can come from various sources, such as employer-sponsored plans like 401(k)s, traditional IRAs, and Simplified Employee Pension (SEP) IRAs.
Types of Retirement Accounts
- 401(k) Plans: Contributions made to employer-sponsored 401(k) plans are typically made on a pre-tax basis, reducing your taxable income.
- Traditional IRA: Contributions to a traditional IRA may be fully or partially deductible, depending on your income and whether you or your spouse are covered by a workplace retirement plan.
- SEP IRA: Self-employed individuals can also take advantage of SEP IRAs, which allow for higher contribution limits and deductions.
Benefits of Retirement Contribution Deductions
These deductions not only lower your taxable income but also help you save for retirement. The money you contribute can grow tax-deferred, meaning you won’t pay taxes on earnings until you withdraw funds during retirement.
Limitations
It’s important to be aware of contribution limits set by the IRS for each type of retirement account, which may change annually. Additionally, income thresholds may affect your eligibility for certain deductions.