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You can make contributions to an individual retirement account (IRA) right up until the income tax filing deadline on April 15. Best of all, the money you stash away for retirement can potentially ease your tax bill. Here’s what you need to know about how to lower your taxes with last-minute IRA contributions.
How to Reduce Your Taxes with IRA Contributions
You have until April 18, 2024 to contribute to an IRA—up to $6,500 for tax year 2023, or a total of $7,500 if you’re 50 or older. Those limits rise to $7,000 and $8,000 for 2024.
The deadline every year is the federal tax filing deadline, which can move past the customary April 15 due to a holiday. If you live in an area that’s been declared a federal disaster, your deadline may also be extended, giving you more time to contribute to an IRA.
Contributions to a traditional IRA are generally deducted from your taxable income immediately, as long as you qualify for the deduction. The investments in your account grow tax-free until you start making withdrawals after you turn 59 ½, when you’ll owe income taxes on distributions.
Traditional IRA contributions can save you a decent amount of money on your taxes. If you’re in the 24% income tax bracket, for instance, a $6,500 contribution to an IRA would equal $1,560 off your tax bill. You have until tax day for 2023—which is April 15, 2024—to make IRA contributions that reduce your taxable income for 2023.
If you have access to some other types of IRAs, like a SEP IRA, you can also make last-minute contributions. Designed for small businesses or the self-employed, SEP IRAs offer contribution limits that are almost 10 times what you get with standard IRAs. You can make contributions to both a SEP IRA and a personal IRA. You can even file an extension and get additional time to make SEP IRA contributions.
IRA Calculator
Use our traditional IRA calculator to see how much your nest egg will grow by the time you reach retirement.
How to Get an IRA Tax Deduction
Anyone with earned income can open a traditional IRA, contribute the max and benefit from tax-deferred investment growth. But there are strict rules about who’s eligible to reap tax deductions from contributions that can lower your income tax.
Anyone not covered by a workplace defined contribution plan, like a 401(k), can deduct all of their traditional IRA contributions from their taxes. It’s a bit more complicated if you and/or your spouse are covered by a retirement plan at work.
Traditional IRA Tax Deduction Income Limits for 2023 and 2024
| FILING STATUS | 2023 INCOME | 2024 INCOME | DEDUCTION |
|---|---|---|---|
Single, head of household or qualifying widow(er) | Less than $73,000 | Less than $77,000 | Full deduction up to the contribution limit |
$73,000 to $83,000 | $77,000 to $87,000 | Partial deduction | |
More than $83,000 | More than $87,000 | No deduction | |
Married filing jointly or qualifying widow(er) | Less than $116,000 | Less than $123,000 | Full deduction up to the contribution limit |
$116,000 to $136,000 | $123,000 to $143,000 | Partial deduction | |
More than $136,000 | More than $143,000 | No deduction | |
Married filing separately | Less than $10,000 | Less than $10,000 | Partial deduction |
More than $10,000 | More than $10,000 | No deduction |
Keep in mind that the limits change slightly if your spouse has access but you do not.
Does a Last-Minute IRA Contribution Make Sense for You?
Just because you can make one of these last-minute IRA contributions doesn’t mean you necessarily should. If you’re a high earner eligible for a full or partial deduction, getting a contribution under the wire could make a lot of sense. Out of all the retirement tax moves at your disposal for the previous year, you might stand to benefit the most from this strategy.
And if you’re not in one of the higher tax brackets now? You certainly can still contribute to a traditional IRA, but your deduction may not be that great. Someone in the 12% tax bracket, for instance, might only save $780. Nothing to sneeze at, sure. But you might actually get better tax advantages in the long run from a Roth IRA.
Roth IRAs Can Save You Big on Taxes Later
A Roth IRA is funded with dollars that have already faced Uncle Sam’s wrath. That means no upfront tax deductions (and no decreases to your taxable income now), but you never have to pay a dime on withdrawals made after you turn 59 ½.
If you’re in a lower tax bracket now, you could potentially save almost double the taxes you’d owe later if you move into a higher bracket in retirement, assuming you moved from a 10% or 12% to any of the other brackets. That’s why a Roth IRA makes a ton of sense for younger earners who are in a lower tax bracket today than they’ll see once they hang up their boots.
In fact, anyone who’s able to contribute to a Roth now may stand to benefit long term. “If you’re eligible for a Roth IRA, you’re probably better off paying taxes now,” said Wealthfront certified public accountant (CPA) Tony Molina. “We’re in a period of historically low tax rates.”
Unfortunately, not everyone can contribute to a Roth IRA. Much like the traditional IRA tax deduction limits we covered earlier, there are income cut-offs that put the Roth IRA out of reach of high earners.
Roth IRA Income Limits in 2023 and 2024
| FILING STATUS | 2023 INCOME | 2024 INCOME | YOU MAY CONTRIBUTE |
|---|---|---|---|
Single, head of household or married filing separately (and you did not live with your spouse at any time during the year) | Less than $138,000 | Less than $146,000 | Up to the annual limit |
$138,000 to $153,000 | $146,000 to $161,000 | A reduced amount | |
More than $153,000 | More than $161,000 | Zero | |
Married filing jointly or qualified widow(er) | Less than $218,000 | Less than $230,000 | Up to the annual limit |
$218,000 to $228,000 | $230,000 to $240,000 | A reduced amount | |
More than $228,000 | More than $240,000 | Zero | |
Married filing separately | Less than $10,000 | Less than $10,000 | A reduced amount |
More than $10,000 | More than $10,000 | Zero |
While Roth contributions today won’t lower your taxes today, there’s more to retirement savings strategies than saving a few bucks on your tax bill in the here-and-now.
When a Traditional IRA Makes More Sense for Low Earners
Still, there may be some scenarios where it makes sense for those without the biggest incomes to use a traditional IRA.
To see if these might be right for you, start by preparing your tax return to determine your adjusted gross income. Once you have that number in hand, you can see if you’re close to qualifying for an income-based tax deduction, says Mike Piper, a St. Louis-based CPA. If you are close to qualifying, that would make utilizing a traditional IRA more appealing to save substantially more money now.
You might even get a tax break you’ve never heard of, like the saver’s credit, which less than half of taxpayers know about but that could credit you with up to $2,000.
How would contributing to an IRA help you qualify?
The amount of the saver’s credit depends on your specifics, but in 2023 married couples filing jointly with an AGI between $47,501.01 and $73,000 receive a credit worth 10% of their contribution (up to $2,000) to a retirement account. If that couple earned even $73,000.01 in 2023, however, they’d get nothing.
But if they contribute $4,000 to an IRA, they could not only lower their potential income tax liability by $480, but they’d also lower their AGI enough to qualify for a $400 bonus from the saver’s credit.
Even if you can’t qualify for an additional tax break by making a last-minute contribution for this year, running through the steps to figure out which deductions and IRAs you might take now positions you to fully take advantage of them next tax year.
In 2024, eligibility for the saver’s credit—also known as the Retirement Savings Contributions Credit—ends for married joint filers whose income exceeds $76,500. For singles and married people filing separately, eligibility ends when their income tops $38,250, up from $36,500 in 2023.
