As we approach Thanksgiving, the end of the year, and start thinking about taxes, I’m reminded of celebrating financial wins. A financial win I’m thankful for: the ability to make deductible IRA contributions. 

This simple but powerful tool offers a range of benefits for those who qualify, especially you if you are not participating in a workplace retirement plan. For investors who don’t participate in a workplace retirement plan (such as a 401(k) or 403(b)), it’s an even bigger win. 

Contributing to a traditional IRA not only helps build your retirement savings but also reduces your tax bill, thanks to the above-the-line deduction.

Let’s take a closer look at why deductible IRA contributions are something to be thankful for, and how you can take full advantage of them.

A financial win: The ability to make deductible IRA contributions

Why the Traditional IRA is a Win-Win

As an investor, and for many others, we have an abundance to be thankful for, and one reason is the ability to contribute to a traditional IRA and receive an above-the-line tax deduction. This deduction allows you to subtract the amount you contribute from your taxable income, even if you don’t itemize deductions. 

It’s available to anyone who qualifies, offering a chance to lower the amount of tax owed for the year while simultaneously building your retirement nest egg. For those not covered by a workplace retirement plan, this deduction becomes even more valuable. 

You can deduct your contributions up to the annual limit (which for 2024 is $8,000 if you’re 50 or over, and $7,000 if younger than 50). This dual advantage:

• boosting savings and cutting taxes
• makes the traditional IRA an essential tool for long-term financial planning.

Personal Reflection: Why I’m Thankful for This Benefit

Over the years, I’ve seen firsthand the power of taking advantage of deductible IRA contributions. As a financial planner, I’ve always looked for ways to minimize taxes while helping my clients reach their money goals. 

For me, it’s been a way to consistently add to my retirement savings while keeping my tax bill as low as possible. And when I say “as low as possible,” I mean it. 

It’s one of the most straightforward strategies to keep more of your hard earned money. For many high earners, the tax benefits are especially critical. 

Even if you’re taking the standard deduction on your taxes, you can still reduce your taxable income by making an IRA contribution. In other words, you don’t need to itemize deductions to take advantage of this opportunity. 

This is where the real beauty of the traditional IRA lies, it benefits almost everyone.

How Deductible IRA Contributions Work

Let’s break down the mechanics of how deductible IRA contributions can work for you. If you are not covered by a retirement plan at work, you can make a deductible contribution to a traditional IRA and deduct the full amount on your tax return. 

This effectively reduces your taxable income by the amount of your contribution, meaning you’ll owe less in taxes for that year. For example, let’s say you’re in the 24% tax bracket, and you contribute $8,000 to a traditional IRA. 

This reduces your taxable income by $8,000, potentially lowering your tax bill by $1,920. Essentially, you’re getting a tax break now while allowing your money to grow tax-deferred until you take withdrawals in retirement.

Even if you are covered by a workplace retirement plan, you may still be eligible for a partial deduction, depending on your income level. The important thing to remember is that contributing up to the annual limit can maximize your retirement savings while enjoying immediate tax benefits.

Key Eligibility Considerations

• Income Limits: If you’re covered by a retirement plan at work, the ability to deduct your IRA contributions depends on your modified adjusted gross income (MAGI). For 2024, the deduction begins to phase out at $77,000 for single filers and $123,000 for married couples filing jointly.
• Spousal IRA: If your spouse isn’t covered by a workplace retirement plan but you are, they may still be able to deduct their IRA contributions, even if your income exceeds these limits.

The Power of Pre-Tax Contributions

One of the greatest benefits of deductible IRA contributions is the ability to contribute pre-tax dollars. This means your money grows tax-deferred until you start taking distributions in retirement. This tax deferral can result in significant growth over time, thanks to the power of compounding.

Let me give you an example. Suppose you’re 50 years old and contribute the maximum $8,000 to a traditional IRA each year for the next 15 years. 

Assuming an annual growth rate of 7%, your IRA could grow to nearly $201,032.18 by the time you’re 65. That’s not just your contributions growing, it’s your money growing on top of itself, year after year, in a tax-deferred account.

Maximizing Growth Over Time

Because the money you contribute to a traditional IRA is allowed to grow without being taxed each year, it can compound more effectively. Every dollar you save in taxes today is another dollar that gets invested and earns returns. 

This can add up significantly over time, especially for those who start contributing early or who maximize their contributions each year.

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How to Take Full Advantage of Deductible IRA Contributions

So, how can you make sure you’re getting the most out of your deductible IRA contributions? Here are some quick steps to follow to ensure you’re taking full advantage of this tax deduction and savings booster:

1. Check If You’re Contributing to a Workplace Retirement Plan

Before you make any IRA contributions, check if you’re already contributing to a 401(k), 403(b), or similar workplace retirement plan. If not, you can generally make a deductible contribution to a traditional IRA. 

Even if you are contributing to a workplace plan, it’s worth seeing if you’re eligible for at least a partial deduction based on your income.

2024 IRA deduction phaseout for active participants is:

Single, Head of household $77,000 — $87,000

Married filing jointly $123,000 — $143,000

Married filing separately $0 — $10,000

Spousal IRA $230,000 — $240,000

IRA Tax Savings Calculator for Active Participants

Are you currently participating in a workplace retirement plan and want to make deductible IRA contributions? You may qualify for a partial deduction if you are within the phase out limits mentioned above. 

You will not be able to make deductible contributions if your income is over the phase out amounts mentioned above. The following calculator can help determine your potential tax savings if you qualify.

Fill in the information below and no worries if you do not know your marginal tax rate the calculator will estimate your marginal tax rate for you.

Note: This is a simplified calculation. Actual tax situations can be complex, and you should consult a tax professional for precise advice.

2. Make a Deductible Contribution to an IRA Before April 15th, 2025

You have until the tax filing deadline, April 15th, 2025, to make a contribution for the 2024 tax year. The earlier you contribute, the sooner your money can start growing. 

If you’re not sure how much to contribute, start by aiming for the maximum allowed $7,000 for 50 and younger, and $8,000 if you’re 50 or over.

3. Apply the Deduction to Your 2024 Taxes

When you complete your 2024 taxes, make sure to apply the deduction to your income. This will lower your taxable income for the year, helping to reduce the amount you owe. 

If you’re using a tax preparer, remind them to include this deduction, especially if it’s the first time you’ve contributed to an IRA.

Balancing Current and Future Tax Benefits

While the immediate tax deduction is appealing, it’s important to think about how this fits into your long-term financial plan. After all, traditional IRA withdrawals are taxed as ordinary income in retirement. 

The goal is to balance the current tax savings with the taxes you’ll eventually pay on withdrawals. For many high earners, it makes sense to take advantage of the tax benefits now, while their income (and tax bracket) is higher. 

By the time you retire, you may find yourself in a lower tax bracket, making the deferred taxes less of a burden.

Backdoor Roth Strategy: An Additional Tool for High Earners

If you’re a high earner and your income exceeds the Roth IRA contribution limits, a backdoor Roth conversion may be worth exploring. Essentially, you make a nondeductible contribution to a traditional IRA and then convert it to a Roth IRA. 

While you’ll owe taxes on any earnings at the time of conversion, all future growth will be tax-free.

This strategy can complement your traditional IRA contributions, giving you the best of both worlds, tax-deferred growth now and tax-free withdrawals later.

Final Thoughts: Financially Speaking, I’m thankful for the Simple, Powerful Traditional IRA

I’m thankful for many areas and things in my life, and deductible IRA contributions are on the list when it comes to financial planning. For high earners, these contributions provide a unique opportunity to save for the future while enjoying immediate tax benefits. 

If you haven’t taken full advantage of this tool yet, there’s no better time to start.

Take a few simple steps now to contribute, reduce your tax bill, and grow your retirement savings. With a little planning, you’ll find there’s a lot to be thankful for when it comes to the traditional IRA deductible contributions.