If you’re preparing to file your 2024 tax return and find your tax bill higher than you would like, there may still be an opportunity to lower it. If you qualify, you can make a deductible contribution to a traditional IRA until this year’s April 15 filing deadline and benefit from the tax savings on your 2024 return.
Who’s eligible?
You can make a deductible contribution to a traditional IRA if:
- You (and your spouse) are not an active participant in an employer-sponsored retirement plan, or
- You (or your spouse) are an active participant in an employer plan, but your modified adjusted gross income (MAGI) does not exceed certain levels that vary from year-to-year by filing status.
For 2024, if you are a married joint tax return filer and you are covered by an employer plan, your deductible traditional IRA contribution phases out over $123,000 to $143,000 of MAGI. If you are single or a head of household, the phaseout range is $77,000 to $87,000 for 2024. The phaseout range for married individuals filing separately is $0 to $10,000. For 2024, if you are not actively participating in an employer retirement plan but your spouse is, your deductible IRA contribution phases out with MAGI of between $230,000 and $240,000.
Deductible IRA contributions reduce your current tax bill, and earnings in the IRA are tax deferred. However, every dollar you withdraw is taxed (and subject to a 10% penalty before age 59½, unless one of several exceptions apply).
Traditional IRAs are different from Roth IRAs. You also have until April 15 to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA are not. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you are age 59½ or older. (There are also income limits to make contributions to a Roth IRA.)
If you are married, you can make a deductible IRA contribution even if you do not work. In general, you cannot make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if one spouse has earned income and the other is a homemaker or not employed. In this case, you may be able to take advantage of a spousal IRA.
What are the contribution limits?
For 2024, if you are eligible, you can make a deductible traditional IRA contribution of up to $7,000 ($8,000 if you’re age 50 or older). For 2025, these amounts remain the same.
In addition, small business owners can set up and contribute to Simplified Employee Pension (SEP) plans up until the due date for their returns, including extensions. For 2024, the maximum contribution you can make to a SEP is $69,000 (increasing to $70,000 for 2025).
How can you maximize your nest egg?
If you would like more information about IRAs or SEPs, please reach out to your Rudler, PSC advisor today at 859-331-1717. You can also ask us about tax-favored retirement saving when we are preparing your return. Rudler is here to help you save the maximum amount for retirement in the most tax-efficient way.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Kacie Hamlett, Staff Accountant and Matt Topmiller, CPA.
If you would like to discuss your particular situation, contact Kacie or Matt at 859-331-1717.
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