Will Opening an IRA Help You Save Money on Taxes?

Go after those tax benefits by investing in a traditional or Roth IRA

Updated on December 12, 2022

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It’s always smart to consider investing in a tax-advantaged account, such as an individual retirement account (IRA) or a 401(k), when you're saving for retirement. These accounts allow you to reduce the taxes you'll pay on your income, and to increase the amount you'll get to keep in retirement.

Different accounts offer different kinds of tax advantages, so it’s important to understand the mechanics of how each one works. An IRA is a great vehicle for retirement savings, because it allows an individual to invest in almost any security in a tax-advantaged way.

There are different types of individual retirement accounts such as traditional IRAs and Roth IRAs that can help you with tax planning.
Total contribution limit for all IRAs combined is $6,000, ($7,000 if you’re over 50 years of age) in tax year 2022 and $500 higher in tax year 2023.
IRS also sets income-based limits to determine how much you can deduct from traditional IRAs and contribute into Roth IRAs.
You invest pre-tax money into a traditional IRA, and pay tax, hopefully at a lower rate, when you take a distribution in retirement.
Investment in Roth IRAs is after-tax dollars, but the benefit is that you don’t pay taxes when you take the distribution. The Roth IRA investment is not deductible.
IRA contributions for a tax year must be made by the Tax Day in the following year.

Traditional IRAs: Tax Savings Upfront

You can contribute up to $6,000 total into all of your traditional IRA and Roth IRA accounts annually in tax year 2022 and $7,000 if you're 50 or older, and those limits are $500 higher in 2023. Your contributions can be deducted from your taxable income.

If you were 35, making $75,000 a year, and filing single, your taxable income in 2023 would drop to $68,500 if you maxed out your contributions. Your savings could be even greater if the deduction dropped you into a lower tax bracket.

Note

Anyone who can report earned income can contribute to a traditional IRA. It's an especially useful option for workers who don’t have a 401(k) plan through their employer.

Workers with high incomes might not be able to claim the full tax-deduction limit for their contributions if they're also covered by a workplace retirement plan. These limits are calculated using your modified adjusted gross income (MAGI).

Eligibility breaks down like this for tax year 2022:

Filing Status	MAGI	Deduction
Single or head of household	$78,000 or more	None
Single or head of household	More than $68,000 but less than $78,000	Partial
Single or head of household	$68,000 or less	Full, up to your contribution limit
Married filing jointly or qualifying widow(er)	$129,000 or more	None
Married filing jointly or qualifying widow(er)	More than $109,000 but less than $129,000	Partial
Married filing jointly or qualifying widow(er)	$109,000 or less	Full, up to your contribution limit

The deduction is also phased out for anyone who contributes to an IRA and isn't covered by a workplace retirement plan but is married to someone who is. The phaseout applies if the couple’s income is $204,000 to $214,000 in tax year 2022.

In addition to the tax deductions available for contributing to a traditional IRA, any gains or earnings on the investments held in the account aren't taxed until the money is withdrawn from the account. Contributions are also finally taxed at that time. This could result in additional tax savings if the investor is in a lower tax bracket in retirement than they were at the time they made contributions.

Roth IRAs: Tax Savings in the Future

A Roth IRA is something like a traditional IRA in reverse since contributions consist of after-tax dollars, unlike with a traditional IRA. The key feature of a Roth IRA is that investment gains can be withdrawn in retirement completely tax-free.

Note

Since you're contributing after-tax dollars into a Roth IRA, you can't deduct the contributions.

As with traditional IRAs there are income thresholds and limits that determine if and how much money you are able to contribute into a Roth IRA.

Eligibility breaks down like this for tax year 2022:

Filing Status	Full Contribution	Partial Contribution	No Contributions Permitted
Single or head of household	Less than $129,000	$129,000 - $143,999	$144,000 or greater
Married, filing jointly	Less than $204,000	$204,000 - $213,999	$214,000 or greater
Married, filing separately (lived with spouse at any time during the year)	N/A	Less than $10,000	$10,000 or greater

Which IRA to Choose?

The good news is that you don’t have to choose between a Roth or traditional IRA. There's no rule that says you can't contribute to both, but the contribution limits apply to them collectively, not individually.

It can be difficult to predict what your income and tax bracket will be when you retire, so it often makes sense to put money in both types of accounts so you'll see tax advantages either way—upfront with a traditional IRA that offers tax deductions, and on the back end with a Roth IRA that provides for tax-free withdrawals.

Note

A traditional IRA might not be necessary if you already have access to a 401(k) or similar plan through your employer. Both of these accounts provide upfront tax deductions.

Get that Last-Minute Deduction

Don't fret if it’s late in the calendar year, and you haven’t yet contributed to an IRA. You're permitted to contribute up until Tax Day of the following year. It will still count toward the previous year. That means for the 2022 tax contributions can be made until 2023's tax-filing deadline.

Frequently Asked Question (FAQs)

How much does IRA save in taxes?

If you meet the eligibility criteria and are able to make the whole contribution limit of $6,000 into a traditional IRA in tax year 2022, then you save paying tax on that amount now. The idea is that in retirement your income tax bracket may be lower, and you would be taxed at a lower rate on that money and any gains it makes when you take the distribution. For Roth IRA, while you're contributing after-tax dollars you won't be liable to pay tax when you meet certain criteria.

Who should open an IRA to save on taxes?

Generally, anyone who can report income can invest in a traditional IRA. However, there are limitations to its tax effectiveness, based on your income and filing status. According to the IRS, your traditional IRA contribution "deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels."

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

IRS. "Retirement Topics—IRA Contribution Limits."
IRS. “2022 IRA Contribution and Deduction Limits Effect of Modified AGI on Deductible Contributions if You ARE Covered by a Retirement Plan at Work.”
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IRS. "Roth IRAs."
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