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Getting a tax-deduction allows your contribution to be subtracted out of the taxable income. A smaller taxable income means you pay less taxes in the season you play a role in your Individual retirement account. So you end up with more in your IRA by way of less loss in your pocket than your contribution.

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The 'payroll' tax applies at a set percentage of one's working income - no brackets. A good employee, get yourself a 6.2% of one's working income for Social Security (only up to $106,800 income) and 12.45% of it for Medicare (no limit). Together they take one 7.65% of the income. There's no tax threshold (or tax free) regarding income in this system.

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