Does contributing to a Traditional IRA actually reduce the amount of taxes you owe?

[P_Poirier]

I made a mistake calculating my withholdings for 2016 and now my wife and I (married filing jointly) owe about $2,500. My employer has a 401k plan and combined we make $102,000, so I believe that means we qualify for a partial reduction up to $4,400. My question is, if I just cut a check for $2,500 and open a traditional IRA, does that mean I now owe $0 in taxes?

Thank you

[jerry2000 · Accepted solution]

No. Absolutely not. A deductible contribution to a Traditional IRA does not reduce your tax dollar for dollar. It reduces your tax by reducing your taxable income. The maximum benefit is the amount of your deductible contribution times your marginal tax rate, so, for example, if your marginal tax rate is 25%, then a $1 contribution reduces your tax by, at most, 25 cents. Further, if you are covered by a retirement plan at work your deductible IRA contributions are limited and you may not qualify for any deduction at all. You can find the income limits in IRS Pub. 590-A, at this link
http://www.irs.gov/pub/irs-pdf/p590a.pdf