Most workers are eligible to contribute up to $5,500 to an IRA in 2013 and get a tax deduction on the amount they save. A worker in the 25 percent tax bracket who contributes $5,500 to a traditional IRA this year would pay $1,375 less on his 2013 tax bill. But few people save enough to maximize this tax break.
An Employee Benefit Research Institute analysis of just over 1.6 million IRA accounts found that the average amount contributed in 2011 was $3,723. An IRA contribution of $3,723 will save you $930.75 if you are in the 25 percent tax bracket or $558.45 if you pay a 15 percent income tax rate. Taxes won’t be due on these traditional IRA contributions until you withdraw the money from the account.
People age 50 and older are eligible to contribute $1,000 more to IRAs than younger people, up to $6,500 in 2013. And the average IRA contribution does jump from $4,090 for 40-somethings to $4,780 among people in their 50s, Fidelity found. Once you turn age 70 1/2 you can no longer make traditional IRA contributions, but you can still save in a Roth IRA.
The ability to claim a tax deduction for your traditional IRA contributions is limited if you are also eligible for a 401(k) or similar type of retirement account at work. The IRA tax deduction is phased out for couples with a modified adjusted gross income over $95,000 ($59,000 for singles) in 2013. And couples who earn $115,000 or more ($69,000 for singles) are not eligible for this tax deduction if they also have a retirement account at work. If you are not covered by a retirement plan but your spouse is, the deduction begins to be phased out once your joint modified AGI exceeds $178,000 and is eliminated when your AGI hits $188,000.
IRA contributions for 2013 must be made by April 15, 2014.
Read about this at US News website under retirement.