Please ensure Javascript is enabled for purposes of website accessibility

Ask a Fool: What Tax Breaks Are Available for Retirement Savings?

By Matthew Frankel, CFP® - Oct 27, 2017 at 1:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Saving more for retirement can be one of the smartest tax moves you can make. The real question is when you want to see the benefit.

Q: I know you can deduct certain retirement savings contributions, but not others. How do these tax benefits work?

There are several types of tax-advantaged retirement savings accounts – 401(k)s, 403(b)s, traditional IRAs, Roth IRAs, SEP-IRAs, Thrift Savings, and 457 plans, just to name some of the most common. However, the contributions to all of them can be divided up into two broad categories: those that get you a tax break now, and those that get you a tax break later.

Those that get you a tax break now include most 401(k) contributions (which are generally taken pre-tax from your paycheck) and all traditional IRA contributions. Investing money through these types of accounts will lower your taxable income for the current tax year. For example, qualifying traditional IRA contributions of up to $5,500 ($6,500 if you're 50 or older) will reduce your 2017 taxable income.

The catch is that when you take the money out of these retirement savings vehicles later, those withdrawals will count as taxable income.

On the other hand, there are the accounts for which contributions don't provide any immediate tax breaks (also known as Roth contributions), but for which qualifying withdrawals are 100% tax-free. This means you'll pay no taxes on your profits from the investments held in them, which makes them a solid way to reduce your tax bills in retirement.

Finally, for those taxpayers with low to moderate incomes, contributions to all qualifying retirement accounts are eligible for the Saver's Credit. Formally known as the Retirement Savings Contributions Credit, this can cut your tax burden by up to $1,000 per year.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.