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Tax Preparation online help - Taxes on IRA Contributions

For tax deduction purposes, there are two types of IRA contributions - tax deductible IRA contributions and IRA contributions that are not tax deductible.

Traditional IRA and SEP IRA are exmples of IRA accounts which IRA contributions are tax deductible. Roth IRA is an example of an IRA which contributions are not tax deductible.

Multiple IRA

If you have multiple IRA accounts, you can split your IRA contributions among multiple IRA accounts. The IRS only concerns about the total amount of IRA contributions. Your IRA contributions must fall below annual IRS IRA contribution limits.

How to choose IRA contributions

If you are eligible for all types of IRA accounts, you should consider the following factors concerning taxes on IRA contributions.

1) Your income level

If you are an active participant of an employer retirement plan such as a 401k or 403b, your adjusted gross income (AGI) may prevent you from making deductible IRA contributions. If your adjusted gross income (AGI) is higher than the IRA contributions limit, your traditional IRA contributions may not be deductible. Also, you might not be able to contribute to a Roth IRA at all. If your adjusted gross income is too high, you will not be able to make an IRA contribution to a Roth IRA, but you can always make a traditional IRA non deductible contribution if you have earned income.

2) Your age

If you are 70 1/2 or older, you cannot make IRA contributions to a deductible traditional IRA or a non deductible traditional IRA. However, you can make an IRA contribution to a Roth IRA if you meet the Roth IRA eligibility requirements.

3) Value of tax deduction of IRA contributions

If you are eligible for all IRA types of accounts, then it is important that your consider which type of IRA contributions will give you the most benefits. To do this, you have to weigh the current tax benefitss of the tax dedcution agaisnt the future benefit of tax free income (which is possible with Roth IRA).