Table of Contents
Table of Contents
Receiving a Tax Deduction
Splitting Your Contribution
Saver’s Credit
IRA FAQs
The Bottom Line
- Retirement Planning
- IRAs
How to take full advantage of the benefits
By
:max_bytes(150000):strip_icc()/denisepic__denise_a-5bfc262f4cedfd0026c01131.jpg "IRA Contributions: Deductions and Tax Credits (1)")
Updated February 08, 2024
Reviewed by
Marguerita Cheng
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Reviewed byMarguerita Cheng
Full Bio
Marguerita is a Certified Financial Planner (CFP), Chartered Retirement Planning Counselor (CRPC), Retirement Income Certified Professional (RICP), and a Chartered Socially Responsible Investing Counselor (CSRIC). She has been working in the financial planning industry for over 20 years and spends her days helping her clients gain clarity, confidence, and control over their financial lives.
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:max_bytes(150000):strip_icc()/MichaelRosenston-dc9ea36078684eb9a17e5bbbed31dbad.jpg "IRA Contributions: Deductions and Tax Credits (3)")
Part of the Series
Tax Deductions and Credits Guide
Understanding Tax Breaks
- Tax Deductions and Credits Guide
- Tax Relief
- Tax Benefit
- Tax Break
- Deductions Taxpayers Lost
Tax Credits
- Refundable Credit
- Non-Refundable Credit
- Earned Income Credit (EIC)
- Saver's Tax Credit
- Unified Credit
- General Business Tax Credits
- Foreign Tax Credit
Tax Credits for Parents/Students/Dependents
- Dependent
- How Dependents Reduce Taxes
- Child and Dependent Care Credit
- Child Tax Credit
- Additional Child Tax Credit
- Hope Credit
- American Opportunity Tax Credit
Tax Deductions
- Tax Deductions
- Itemized Deductions
- Tax-Deductible Interest
- Tips on Charitable Contributions
- Medical Expenses
- Educator Expense Deduction
Tax Deductions for Real Estate
- Tax Advantages of Buying a Home
- Home Mortgage Interest
- Second Home Deductions
- Rental Property Deductions
- Foreign Real Estate
Tax Deductions for Retirement Savings
- 401(k) vs. IRA
- IRA Tax Breaks
CURRENT ARTICLE
The primary benefits of contributing to an individual retirement account (IRA) are the tax deductions, the tax-deferred or tax-free growth on earnings, and if you are eligible, nonrefundable tax credits. To get the most out of contributing to your IRA, it’s important to understand what these benefits mean and the limitations placed on them.
Key Takeaways
- The benefits of contributing to an IRA include tax deductions, tax-deferred or tax-free growth on earnings, and tax credits if you're eligible.
- The deductibility of your contributions is determined by your income and your tax-filing status.
- You can make nondeductible IRA contributions even if your traditional IRA contribution isn't deductible.
- Splitting your contribution between a traditional and Roth IRA can be a good move in certain circ*mstances.
- A nonrefundable tax credit is available to eligible taxpayers who contribute to a traditional or Roth IRA or an employer-sponsored retirement plan.
Receiving a Tax Deduction
If you do not participate in an employer-sponsored plan, such as a 401(k), a SEP IRA, a SIMPLE IRA, or another qualified plan, contributions to your traditional IRA may be tax-deductible.
If you participate in any of these plans, you may be considered an active participant, and the deductibility of your contributions would be determined by your modified adjusted gross income (MAGI) and your tax-filing status—that is, whether you and your spouse file separately, you're married and file jointly, or you're a single filer.
If your traditional IRA contribution is not deductible, you may still make a nondeductible IRA contribution to it. Alternatively, you may contribute to a Roth IRA, provided your MAGI satisfies the Roth IRA eligibility limits. The table below details the limits for tax years 2023 and 2024.
| MAGI and Contribution Limits for Roth IRAs for 2023 and 2024 | |||
|---|---|---|---|
| Filing Status | 2023 MAGI Limit | 2024 MAGI Limit | Roth IRA Contribution Limit |
| Married Filing Jointly | Less than $218,000 | Less than $230,000 | Full contribution |
| $218,000 to $228,000 | $230,000 to $240,000 | Partial contribution | |
| $228,000 or more | $240,000 or more | No contribution allowed | |
| Married Filing Separately | $0 to $9,999 | $0 to $9,999 | Partial contribution |
| $10,000 or more | $10,000 or more | No contribution allowed | |
| Single | Less than $138,000 | Less than $146,000 | Full contribution |
| $138,000 to $153,000 | $146,000 to $161,000 | Partial contribution | |
| $153,000 or more | $161,000 or more | No contribution allowed | |
For the table above, the full contribution limit is $6,500 for 2023 and $7,000 for 2024. In addition, individuals 50 years old and older qualify for an additional $1,000 catch-up contribution. If your income falls between the ranges that allow only a partial contribution, you may use a special formula to determine that partial contribution. An IRA calculator will further help you determine if you’re eligible for an IRA.
Should you decide to make a nondeductible contribution to your traditional IRA, be sure to file IRS Form 8606, which helps you and the IRS keep track of the nontaxable balance in your traditional IRAs, ensuringthat you do not pay taxes on distributions that should be tax-free.
If you are married but lived apart from your spouse for the entire year, you must file in the single category.
Splitting Your Contribution
Splitting your contribution between your traditional and Roth IRA may be beneficial in certain circ*mstances:
- If you are eligible for only a partial deduction on your traditional IRA. Instead of contributing the nondeductible amount to a traditional IRA, in which earnings grow tax-deferred, you can contribute the amount to a Roth IRA, in which earnings grow tax-free.
- If you are eligible for only a partial Roth IRA contribution. To maximize your contribution for the year, you can contribute the difference to your traditional IRA.
Your combined contributions to your Roth and traditional IRAs should not exceed the IRA contribution limit. Again, the limit for 2023 is $6,500 and $7,000 for 2024. For those who are 50 or older, an additional catch-up contribution of $1,000 is allowed.
Saver’s Credit
Make sure to find out if you are eligible for the IRS’s saver’s credit. You qualify if you meet the following criteria:
- You're 18 years old or older
- You aren't claimed as a dependent on someone else's tax return
- You aren't a student
You may be eligible for a nonrefundable tax credit of up to 50% of your IRA contribution, not exceeding $1,000 ($2,000 if married filing jointly), depending on your adjusted gross income (AGI). Below are the 2023 and 2024 tax credits that are allowed for combinations of particular income ranges and tax-filing statuses:
| 2023 Saver's Credit | |||
|---|---|---|---|
| Credit Rate | Married and files a joint return | Files as head of household | Other category of filers |
| 50% | AGI up to $43,500 | AGI up to $32,625 | AGI up to $21,750 |
| 20% | $43,501- $47,500 | $32,626 - $35,625 | $21,751 - $23,750 |
| 10% | $47,501 - $73,000 | $35,626 - $54,750 | $23,751 - $36,500 |
| 0% | More than $73,000 | More than $54,750 | More than $36,500 |
| 2024 Saver's Credit | |||
|---|---|---|---|
| Credit Rate | Married and files a joint return | Files as head of household | Other category of filers |
| 10%-50% | AGI of $76,500 and lower | AGI of $57,375 and lower | AGI of $38,250 and lower |
| 0% | AGI of more than $76,500 | AGI of more than $57,375 | AGI of more than $38,250 |
This non-refundable tax credit is allowed in addition to any deduction you may receive for your IRA contribution. In order to claim the nonrefundable tax credit, you must file IRS Form 8880, the most current version of which is available on the IRS website.
What Is the Difference Between an IRA and a 401(k)?
An IRA is a self-managed retirement amount where you select your own broker, have a broader range of retirement investment options, and can have automatic withdrawals taken out of your bank account. A 401(k) is managed by your employer, though you do get to select your contribution amount and investments. Each type of retirement account has different contribution limits, income thresholds to contribute, and rules around distributions.
What Is the Difference Between a Roth IRA and a Traditional IRA?
A Roth IRA allows an individual to contribute to a retirement account. However, these contributions are not tax deductible when contributions are made. Instead contributions are made with after-tax dollars. In exchange, investments grow tax-free and not subject to tax liability when withdrawn at retirement.
A traditional IRA is the opposite. Traditional IRA contributions are tax deductible when made, because contributions are made with pre-tax dollars. The downside to this is that funds are taxable upon withdrawal.
What Are the Downsides of an IRA?
Traditional IRA contributions can't be withdrawn until retirement. This locks your funds into an account that you may not be able to touch for decades without paying taxes and penalties. Roth IRA funds may be withdrawn as long as they do not exceed contributions.
IRAs also incur many downsides like other financial products. IRAs do not guarantee returns, and you may lose capital that you invest. These accounts or trading activity may incur fees, and you will be subject to minimum distribution requirements with a traditional IRA when you reach age 73.
The Bottom Line
As the earnings in your traditional IRA grow on a tax-deferred basis—and on a tax-free basis in your Roth IRA—you have plenty of reasons to contribute to an IRA, along with the benefits discussed above. However, you may want to consult with a financial advisor to determine whether your savings should be directed to other vehicles.
For instance, if you receive a matching contribution in a 401(k) plan, it generally makes better financial sense to contribute the amount necessary to receive the maximum match—and then only contribute to an IRA if you can still afford to do so.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
Internal Revenue Service. "IRA Deduction Limits."
Internal Revenue Service. "401(k) Limit Increases to $23,000 for 2024, IRA Limit Rises to $7,000."
Internal Revenue Service. "About Form 8606, Nondeductible IRAs."
Internal Revenue Service. "Filing Status FAQs."
Internal Revenue Service. "Retirement Savings Contributions Credit (Saver’s Credit)."
Internal Revenue Service. “Traditional and Roth IRAs.”
Internal Revenue Service. "Retirement Plan and IRA Required Minimum Distributions FAQs."
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Part of the Series
Tax Deductions and Credits Guide
Understanding Tax Breaks
- Tax Deductions and Credits Guide
- Tax Relief
- Tax Benefit
- Tax Break
- Deductions Taxpayers Lost
Tax Credits
- Refundable Credit
- Non-Refundable Credit
- Earned Income Credit (EIC)
- Saver's Tax Credit
- Unified Credit
- General Business Tax Credits
- Foreign Tax Credit
Tax Credits for Parents/Students/Dependents
- Dependent
- How Dependents Reduce Taxes
- Child and Dependent Care Credit
- Child Tax Credit
- Additional Child Tax Credit
- Hope Credit
- American Opportunity Tax Credit
Tax Deductions
- Tax Deductions
- Itemized Deductions
- Tax-Deductible Interest
- Tips on Charitable Contributions
- Medical Expenses
- Educator Expense Deduction
Tax Deductions for Real Estate
- Tax Advantages of Buying a Home
- Home Mortgage Interest
- Second Home Deductions
- Rental Property Deductions
- Foreign Real Estate
Tax Deductions for Retirement Savings
- 401(k) vs. IRA
- IRA Tax Breaks
CURRENT ARTICLE
Partner Links
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