Which type of retirement account allows contributions to be tax-deductible?

The selected answer is accurate because contributions made to a Traditional IRA are often tax-deductible, which is a key feature of this type of retirement account. When you make contributions to a Traditional IRA, you can typically deduct those contributions from your taxable income, which can reduce your overall tax liability for the year. This means you effectively defer paying taxes on the money contributed until you withdraw it during retirement.

In contrast, while a Roth IRA allows for tax-free withdrawals in retirement, contributions to a Roth IRA are made with after-tax dollars, meaning you do not receive a tax deduction in the year you contribute. SEP IRAs, which are designed for self-employed individuals or small business owners, also can provide tax-deductible contributions but are a less common choice compared to Traditional IRAs. Social Security Benefits are not a retirement account per se and are funded through payroll taxes; the benefits received in retirement are not based on contributions to a dedicated retirement account.

The option of a Traditional IRA highlights a crucial aspect of retirement planning, specifically the benefits of tax-deductible contributions that can assist individuals in optimizing their taxable income while preparing for retirement.