The Tax Benefits of Contributing to an IRA

I-R-A. Just three little letters, but they can have a big impact on your retirement savings — and your taxes. Let’s break down what an IRA (individual retirement account) really is, how it works, and how you can use one to your advantage during tax time and beyond.

What is an IRA?

An IRA, or individual retirement account, is a type of retirement savings account designed to help you save for the future with some pretty nice tax advantages built in. You can open an IRA through a bank, a brokerage firm, or with the help of a financial advisor.

Here’s the big picture:

• IRAs offer many different investment options for your contributions, like mutual funds, stocks, and bonds.
• Your money grows either tax-deferred (traditional IRA) or tax-free (Roth IRA), depending on the type of IRA you choose.
• You can contribute to an IRA even if you’re self-employed or your employer doesn’t offer a retirement plan like a 401(k) or 403(b).

You can open an IRA at any time, whether retirement is decades away or just around the corner. But when it comes to investing, time is your friend — the earlier you start contributing to an IRA, the more time your investments have to grow.

Types of IRAs: traditional vs. Roth

There are two primary types of IRAs: traditional and Roth. Each comes with its own set of tax rules, benefits, and eligibility requirements, so knowing the differences is important to maximizing your finances in retirement.

Traditional IRA

• Contributions are made with pre-tax dollars (meaning they are typically tax-deductible).
• Your money grows tax-deferred until you withdraw it.
• You’ll pay income tax on withdrawals in retirement.
• You must begin taking required minimum distributions (RMDs) starting at age 73 (or age 72 if you were born before July 1, 1949).
• A 10% early withdrawal penalty applies if you take distributions before age 59 ½ .

Roth IRA

• Contributions are made with after-tax dollars, so you won’t get a tax break up front.
• Your money grows tax-free, and qualified withdrawals are tax-free in retirement.
• No RMDs during the original account holder’s lifetime — which can be a nice perk if you want to keep the money growing longer. (RMD rules still apply to any beneficiaries who may inherit your IRA.)
• You can withdraw contributions at any time without penalty.
• However, to withdraw earnings (investment gains) without penalty, the Roth account must have been open for five years and you must be at least age 59 ½ (some exceptions apply).
• Income limits apply (more on these below).

Roth IRA vs. traditional IRA quick comparison

2024 and 2025 IRA contribution limits

The IRS sets annual contribution limits that apply to all your IRA accounts combined. The contribution limit for both tax years 2024 and 2025 is:

• Up to $7,000 for those under age 50
• Up to $8,000 for those age 50 or older (called a catch-up contribution for those closer to retirement age)

To contribute to either type of IRA, you must have earned income (like wages or self-employment income). Passive income, such as interest or investment returns, doesn’t count.

Income limits for Roth IRA contributions for 2025

Your eligibility to contribute to a Roth IRA starts to phase out at certain income levels, based on your modified adjusted gross income (MAGI) and filing status:

• Single, head of household, and married filing separately (and you didn’t live with your spouse at all during the year):
  • You can make a full contribution if your MAGI is less than $150,000.
  • Reduced contributions are allowed until your MAGI reaches $165,000.
  • After that, no contributions are allowed.
• Married filing jointly or surviving spouse:
  • You can make a full contribution if your MAGI is less than $236,000.
  • Reduced contributions are allowed until your MAGI reaches $246,000.
  • After that, no contributions are allowed.

Note: If you are married filing separately and lived with your spouse at any time during the year, you can only make reduced contributions, and only if your MAGI is under $10,000. No contributions are allowed if your income exceeds $10,000.

Deduction limits for traditional IRA contributions in 2025

While there are no income limits for contributing to a traditional IRA, if you (or your spouse) are covered by an employer-sponsored retirement plan, your ability to deduct traditional IRA contributions may be limited based on your income level and filing status.

Here’s how your income and filing status impact whether you can deduct your traditional IRA contributions in 2025:

If you don’t have access to a workplace plan (and your spouse doesn’t either), your traditional IRA contribution is fully deductible no matter your income.

Tax benefits of IRAs

Traditional IRA tax benefits

• Contributions may be tax-deductible, reducing your taxable income for the year.
• If you are right on the edge between two tax brackets, contributing to a traditional IRA could push you into a lower tax bracket or help you qualify for other tax credits.
• You defer paying income tax on your investment earnings until retirement.

Example

Say your income is $60,000 as a single filer, and you contribute $6,000 to a traditional IRA in 2025. Since your income is lower than the MAGI limit, you can take a tax deduction for your entire contribution amount. Your taxable income drops to $54,000, saving you money in taxes.

Roth IRA tax benefits

• You don’t get a tax deduction when you contribute, but your money grows tax-free.
• In retirement, qualified withdrawals (including earnings) are 100% tax-free.
• This can be a big benefit if you expect your tax rate to be higher in retirement.

How to open and contribute to an IRA

You can open an IRA in a few different ways:

• Through your employer, if they offer one (usually a SIMPLE IRA or SEP IRA for small businesses)
• Online with a brokerage or robo-advisor
• With help from a financial advisor

Once your IRA is open, you can fund it with:

• Direct contributions from your bank account
• A rollover from a 401(k), 403(b), or another IRA account

Just make sure your total contributions stay within the annual IRA contribution limits.

Strategic tips for maximizing your IRA

• Start early! Compounding interest over time = more growth.
• Max out your contributions if possible each tax year.
• Consider your tax bracket. For example, you might want to choose a Roth IRA if you expect to be in a higher bracket later.
• Use both types strategically. Depending on your situation, you may benefit from splitting contributions between a traditional and Roth IRA.
• Watch the income limits if you’re planning to contribute to a Roth or take a tax deduction.

FAQs

Can I contribute to both a traditional and Roth IRA in the same year?

Yes, but your total contributions across both can’t exceed the annual limit ($7,000 for 2025, or $8,000 if you’re 50+).

What happens if I contribute too much to my IRA?

If you contribute more than the annual limit, you may owe a 6% excess contribution penalty. But don’t panic just yet — you can avoid penalties by removing the extra amount (and any interest or other income it earned) before the tax filing deadline.

Check out our IRA excess contributions support page for more info on this topic.

Do IRAs come with any age limits?

There’s currently no age limit for making IRA contributions, but you must have earned income.

What’s the difference between tax-deferred and tax-free growth?

• Tax-deferred growth means you delay paying taxes until withdrawal (traditional IRA).
• Tax-free growth means you never pay taxes on qualified withdrawals (Roth IRA).

Can I claim an IRA on my tax return?

Yes, if you make a tax-deductible contribution to a traditional IRA, you can claim it as a deduction on your tax return. TaxAct can help you with this if you e-file with us.

How do IRA rollovers work?

You can move funds from a workplace plan or another IRA into your current IRA account without tax penalties — as long as you follow IRS rollover rules.

Can I use my IRA for medical expenses or other early withdrawals?

Yes, in certain cases, you may be able to take early distributions without triggering the 10% penalty (taxes may still apply). Some examples that may qualify you for an exception include unreimbursed medical expenses, higher education expenses, or buying your first home.

For more info, check out exceptions to tax on early distributions on irs.gov.

Can I contribute to an IRA if I’m self-employed?

Yes! As long as you have earned income, you can contribute to a traditional or Roth IRA — even if you’re self-employed. In fact, you may also want to look into other retirement plan options designed for self-employed individuals, such as a SEP IRA or SIMPLE IRA, which have higher contribution limits than traditional or Roth IRAs.

The bottom line

IRAs are one of the most powerful tools for building retirement savings while also opening the door to valuable tax advantages. Whether you’re drawn to the upfront tax break of a traditional IRA or the long-term tax-free growth of a Roth, there’s a good chance you can make one work for you. Plus, IRAs aren’t just for the wealthy — any taxpayer with earned income can get started, even with modest contributions.

Looking for help calculating your IRA deduction or checking your eligibility? TaxAct can walk you through it step by step during your tax filing process.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

More to explore:

• 4 Reasons You Should Consider an IRA
• 6 Ways to Maximize Your 401(k) or IRA Plan Contributions
• Ways to Save for Retirement on Minimal Income
• How to Make an Income Plan as a Freelancer
• 5 Things You Should Know About Crowdfunding and Taxes