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Tax-deductible IRA: An Individual Retirement Account

(Contributions are tax-deductible)

In a traditional Individual Retirement Account (IRA), your earnings grow free from federal income tax until you actually start making withdrawals. Over time, the tax-deferral advantage can dramatically affect your retirement funds, permitting them to increase at a more rapid rate. Although withdrawals from a traditional IRA are generally taxable as ordinary income (with the exception that amounts attributable to any nondeductible IRA contributions are returned tax-free), even after paying taxes on your withdrawals, you will normally end up with substantially more money than you would through a conventional savings program.

If you meet the eligibility requirements, your contributions may be tax deductible for federal income tax purposes. As a result, if you are eligible to take a full or partial tax deduction, your current-year tax bill is reduced. For example, if you make $2,000 of deductible contributions to an IRA and you are in the 31% tax bracket, you will save $620 on current-year taxes. Put another way, you will have invested $2,000 at an after-tax cost of only $1,380!
 
 

Tax-deductible IRA

Eligibility






Any single person not active in an employer-sponsored retirement plan.
Any single person active in an employer-sponsored retirement plan who has AGI below $40,000 for 1998 or 41,000 for 1999 (subject to phase-out rules).
Any married person when both spouses are not active in employer-sponsored retirement plans.
A married person not active in an employer-sponsored retirement plan whose spouse is active in such a plan, if the couple files jointly and has AGI below $160,000 (subject to phase out).
A married person filing separately with AGI below $10,000 who is an active participant in a retirement plan or who has a spouse who is an active participant in a retirement plan (subject to phase out).
People, who have been separated from their spouse for at least one year, are active participants in a retirement plan and meet the AGI eligibility for singles.
Contribution Limits An investor can contribute earned income up to $2,000 ($4,000 for married couples filing jointly) but this maximum contribution phases out at the following levels: