Deductible contribution Definition Bankrate.com Caret RightMain Menu Mortgage Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Bank Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Credit Card Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Caret RightMain Menu Loan Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Invest Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Home Equity Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Loan Home Improvement Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Insurance Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Retirement Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content

Deductible contribution

What does deductible contribution mean? Let Bankrate explain.

What is a deductible contribution

A deductible contribution is a payment to a traditional individual retirement account (IRA) that is tax deductible if you are not a beneficiary of your employer’s retirement plan.

Deeper definition

A deductible contribution is the part of your retirement contribution on which you are required to pay a tax. Depending on your filing and income status, you may still deduct the payments to a traditional IRA even though you participate in a 401(k) or company pension plan. The exception to this is when you make a payment to a Roth IRA. You can claim a deduction for the total contribution to your IRA on your individual national income tax. By allowing you to deduct your payments on your tax return, a deductible contribution can lower your tax bill; thus, you obtain a refund on your earlier paid taxes for that year. Though a deductible contribution is a better deal, your qualification for one depends on your filing status, income, eligibility for Social Security benefits and access to a retirement plan sponsored by the employees at work. You can make your contributions to traditional IRAs no later than the first date due for a tax return. Moreover, you can choose to contribute to a Roth IRA or traditional IRA, or both. Your total payment to either Roth or traditional IRAs for the year cannot be more than the annual maximum amount or the least year’s income. You must pay taxes on the entire amount when you withdraw from your traditional IRA unless your traditional IRA includes nondeductible contributions. The percentage of the withdrawal that is equal to the nondeductible contribution rate is not taxed when withdrawing from a traditional IRA that includes nondeductible contributions.

Deductible contribution example

Sammy’s salary is $80,000, and he contributes $800 — equivalent to 1 percent of his compensation to his employer’s IRA plan. This $800 becomes Sammy’s deductible contribution. Based on the requirements of the deductible contribution, the employer must balance the $800 contribution since he is required only to match the amount Sammy actually contributes up to 3 percent during the year that is the maximum of the year’s compensation. Are you wondering how you can make good retirement savings? Check out these 10 best steps to take right now.

More From Bankrate

Rising health care costs are one reason to keep saving and investing. It’s not too late to get a tax deduction for your IRA contributions. The SECURE Act and historically low tax rates make a Roth IRA conversion more attractive. If you are self-employed, you need to be proactive about retirement savings. Find out where to go and what to do when it’s time to start drawing down your IRA. Someone left you a fortune? You can lose a big chunk of it to taxes if you’re not careful. A few people have giant IRAs worth millions. Should the government intervene? Know the rules and avoid potential pitfalls when you inherit a retirement account. If you break into your IRA CD early, the bank might penalize you. Here’s what to do.