Are Roth IRA contributions tax deductible?
The simple answer is no. However, a closer look at the details reveals a more nuanced answer.
Although Roth IRA contributions themselves are not tax deductible, you can claim a Roth IRA tax credit or a claim a loss on a Roth IRA if you are eligible and meet certain requirements.
If you’re wondering how exactly that works, here are some details and scenarios to consider.
Non-Deductible Roth IRA Contributions
Unlike 401(k) or Traditional IRA contributions, Roth IRA contributions are not tax deductible. According to the Roth IRA funding rules established by the IRS, all your contributions must be made with after-tax dollars.
For example, let’s say you earn $40,000, and you’re in the 25% tax bracket. If you want to make a $5,500 tax deductible 401k contribution, you’ll put $5,500 in your 401(k) first and then you pay your taxes, which leaves you with $25,875 (75% of $34,500).
However, if you make a $5,500 non-deductible Roth IRA contribution, you’ll pay your taxes first, which leaves you with $30,000 (75% of $40,000). By making that $5,500 Roth IRA contribution with after-tax dollars, you’ll be left with $24,500 in disposable income. While stashing that money away in your Roth IRA is certainly a smart move, it will leave you with less money to spend throughout the year.