How Much Could You Save on Taxes by Maxing Out Your IRA in 2024?
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Contributing to an IRA is a great way to save for retirement. You can open an IRA with any brokerage firm, so even if you don’t have access to an employer-sponsored retirement plan, you can still use this account. And IRAs usually offer many investment options — more than 401(k)s do — so once you have contributed enough to a 401(k) to earn any matching funds your employer is offering, you may want to switch to putting money into an IRA.
One of the biggest benefits of an IRA is that as long as you meet income limits (which apply if either you or your spouse has another workplace plan), you can deduct from your taxes the amount that you contribute each year. The savings on your taxes helps you offset the contributions you are making to the IRA, so each contribution doesn’t reduce your take-home income by the full amount.
But just how much could you save on taxes if you max out your IRA in 2024? Here’s what you need to know.
Read more: we researched free tax software and put together a list of the best options here
This is your potential tax savings for a maxed out IRA
In 2024, the maximum contribution you can make to an IRA is $7,000, or $8,000 if you are 50 or over and are eligible to make catch-up contributions.
The amount of money you would save on your taxes if you contribute either $7,000 or $8,000 depends on what tax bracket you fall into. The table below shows the maximum tax savings that could come from a contribution, depending on what your marginal tax rate is.
Find out what tax bracket you fall into so you can see your maximum savings based on your marginal tax rate.
How much will you actually save?
When you’re figuring out how much you personally will save, you need to know how marginal tax rates work. If you are in the 22% tax bracket, you don’t pay 22% on all your income. You only pay 22% on income above the threshold at which you crossed into that tax bracket. So, for example, married joint filers would pay:
- 10% on income up to $23,200
- 12% on income between $23,200 and $94,300
- 22% on income between $94,300 and $201,050
And so on, up to the highest marginal tax rate of 37%, which married joint filers would pay on income above $731,200.
The tax savings you get comes from deducting (subtracting) the amount you contribute to your IRA from your income and thus not paying taxes on that amount of earnings. So if you cross tax brackets thanks to your contribution, your savings would be less.
Say, for example, that you made $96,300 and you contributed the maximum $7,000 to your IRA (since you are under 50). Here’s what that would look like:
- Your IRA contribution would bring your taxable income from $96,300 to $89,300.
- If you hadn’t made this contribution, you otherwise would have paid 22% tax on $2,000 in income (the $2,000 above $94,300 that got you to $96,300). So you save 22% on $2,000 of your contribution, or $440.
- You have $5,000 in remaining contributions that bring your income down from $94,300 to $89,300. You save the 12% tax you’d otherwise have paid on those contributions, or $600.
In this example, since you crossed tax brackets due to your savings, your IRA contribution ends up reducing your tax bill by $1,040.
READ MORE: The Ascent’s Complete Guide to Taxes
Now you understand how it works and can figure out exactly how much you can save by maxing out your IRA. As you can see, the savings are substantial. In our above example, you would have contributed $7,000 but paid $1,040 less in taxes, so you would have actually only reduced your take-home pay by $5,960.
It’s worth trying to get as close as you can to maxing out your IRA so you can benefit from this tax break. If you don’t already have one, open an account with the best brokers for IRAs today and start making contributions ASAP so you can get as close to $7,000 or $8,000 in deposited funds over the course of the year.
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