• IRA contributions offer tax benefits.tax forms image by Chad McDermott from Fotolia.com
  
  IRAs, or individual retirement accounts, were first introduced in the 1970s in an effort by the federal government to encourage people to save for retirement. IRAs offer a variety of tax benefits. The specific benefits depend partly on whether the IRA is a tax-deferred IRA, such as a traditional IRA, SEP IRA or SIMPLE IRA, or a Roth IRA.
  
  

Tax Deduction

• Unless you or your spouse is covered by an employer plan or your adjusted gross income exceeds annual limits, you can deduct Traditional IRA contributions from your taxes. (Roth IRA contributions are not deductible.) For example, if you contributed $4,000 to your SIMPLE IRA, you would be able to decrease your taxable income by $4,000, and you can claim this deduction even if you do not itemize your deductions. To calculate the amount you will save on your taxes, multiply the amount of your contribution by your Marginal Tax Rate (the amount paid on the last dollar of income). Continuing the example, if you fall in the 32 percent income tax bracket, you would multiply 0.32 by $4,000 to find that your contribution would save you $1,280 on your annual federal income taxes.
  
  

Tax Credit

• Contributions made to any type of IRA, may qualify you for the retirement savings credit. The retirement savings credit applies to those making a contribution to a qualified retirement plan whose adjusted gross income falls below the annual limit for their filing status. The maximum credit amount as of 2010 equals $1,000 if you are a single filer and $2,000 if you are a joint filer.
  
  

Tax-Sheltered Growth

• Money contributed to any type of IRA, including Roth IRAs, grows tax-free while the money remains in the account. For example, if you fall in the 32 percent tax bracket and your IRA earned $6,000 of returns, you would typically have to pay $1,920 in income taxes. However, since the money is inside a tax-sheltered IRA, you do not have to pay any taxes, which means the money can continue to grow tax-free.