One of the most powerful (and underused) tax strategies available to most workers is also one of the simplest: contributing to a retirement account. Here's how it works and how much it can save you.
Traditional 401(k): Pre-Tax Contributions
When you contribute to a traditional 401(k) at work, the money comes out of your paycheck before federal income taxes are calculated. This means:
- You don't pay income tax on contributions now
- Your taxable income is reduced dollar-for-dollar
- You pay income tax when you withdraw the money in retirement
Example: You earn $70,000 and contribute $10,000 to your 401(k). Your taxable income becomes $60,000. If you're in the 22% bracket, that's $2,200 in immediate tax savings.
2024 contribution limits: $23,000, or $30,500 if you're 50 or older.
Traditional IRA: Deductible Depending on Situation
A Traditional IRA contribution may be fully deductible, partially deductible, or not deductible at all — depending on your income and whether you (or your spouse) have access to a workplace retirement plan.
- No workplace plan: Full deduction at any income level
- With workplace plan: Deduction phases out between $77,000–$87,000 (single) or $123,000–$143,000 (married filing jointly) for 2024
2024 contribution limits: $7,000, or $8,000 if you're 50 or older.
Roth IRA: No Deduction Now, Tax-Free Later
Roth IRA contributions are made with after-tax dollars — you don't get a deduction upfront. But qualified withdrawals in retirement are completely tax-free, including all the growth.
This is often the better choice for younger workers or those who expect to be in a higher tax bracket in retirement.
Income limits apply: Contributions phase out at $146,000–$161,000 (single) or $230,000–$240,000 (married filing jointly) for 2024.
Self-Employed Retirement Accounts
If you're self-employed, you have access to especially powerful options:
SEP-IRA: Contribute up to 25% of net self-employment income, up to $69,000 for 2024. Much higher limit than a regular IRA.
Solo 401(k): Designed for self-employed individuals with no employees. You contribute as both employee ($23,000) and employer (up to 25% of compensation), for a combined limit of $69,000.
SIMPLE IRA: For businesses with up to 100 employees. Employee contributions up to $16,000 for 2024.
The Savers Credit
Lower-income earners can also claim the Retirement Savings Contributions Credit (Savers Credit), worth 10%–50% of your contribution (up to $2,000 contributed), if your income falls below certain thresholds. This is a direct credit — it reduces your tax bill, not just your income.
Tax-Deferred vs. Tax-Free: Which Is Better?
There's no universal answer. Tax-deferred accounts (traditional 401k/IRA) make sense if you're in a high bracket now and expect lower income in retirement. Tax-free accounts (Roth) make sense if you're in a low bracket now or expect higher income later.
Most financial advisors suggest having a mix of both.
When to Make IRA Contributions
You have until the tax filing deadline (usually April 15) to make IRA contributions for the prior year. So if it's January or February and you haven't maxed your IRA, you still can — and claim the deduction on last year's return.
Planning your retirement contributions and not sure what makes sense for your situation? A tax planning session covers exactly this. Book a consultation and we'll map out the strategy together.