A tax deduction can decrease the amount of your taxable income and thereby reduce the amount of income tax you owe. Tax deductions are one way that the government encourages you to save for retirement.
What does it mean if something is a tax deduction?
If something is a tax deduction (or is tax deductible), it may reduce your income tax. Whether or not it reduces your income tax depends on several factors. For retirement planning purposes, however, if an item is tax deductible and you have taxable income, you will likely save on your income taxes. There are no retirement planning deductions that are considered itemized deductions.
What are examples of retirement planning related tax deductions?
The most common retirement planning tax deduction is for regular IRA contributions. If you meet certain income limits, your contribution to a regular IRA is tax deductible and, therefore, saves you money on your taxes. You can claim this deduction on your tax return.
Are contributions to a 401(k) plan tax deductible?
Yes, contributions to 401(k) plans are a tax deduction. However, since the amount you contribute to a 401(k) plan is already subtracted from your taxable wages reported to you and the IRS on Form W2, you can’t deduct your 401(k) contributions again on your tax return.