Contributions are made with after-tax funds and are not tax-deductible, but earnings and withdrawals are tax-exempt (SEP IRA). Traditional IRA deductible contributions may be more advantageous if you expect to be in a lower tax bracket when you retire. In the case of traditional IRAs, your contributions can be tax-deducted on your federal income tax return, which can reduce your taxable income for the year. Keep in mind that, just like in a traditional IRA, the IRS imposes a 10% penalty on early withdrawals.
However, 401 (k) plans have an exception to the penalty if you leave your employer the year you turn 55 or older, which doesn't exist for IRAs. Use this tool to determine if a Roth IRA or a traditional IRA may be right for you. Like 401 (k) plans, IRAs can come in a variety of different flavors. Savers have different ways of preparing for their future depending on their income levels and their tax liability.
Depending on the type of IRA you use, an IRA can lower your tax bill when you make contributions or when you withdraw money when you retire.