How to Lower Your Taxable Income With Last-Minute IRA Contributions

Now that the tax filing deadline is just days away, you may be thinking that it’s too late to reduce what you owe on your 2023 federal income tax return.

But there’s still time to lower your tax bill, or even increase your refund, while contributing to your retirement savings. If you have a traditional individual retirement account, or IRA, you can put money into it for the previous year right up to Tax Day (that’s April 15 in most states this year).

Aside from potentially lowering your taxable income, there are a few benefits to adding to your IRA now. Keep reading to find out what you need to know about last-minute IRA contributions.

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How do I lower my 2023 taxes with IRA contributions?

Every year, the IRS sets maximums for how much you can contribute to your retirement accounts. The most you can put into an IRA in 2023 — both traditional and Roth — is $6,500. If you’ll be 50 or older by the end of this year, you can make an extra $1,000 in “catch-up” contributions.

Only traditional IRAs can lower your taxable income because Roth IRAs are tax-free. You contribute after-tax money to them, so they aren’t tax-deductible.

Traditional IRA contributions reduce your taxable income dollar for dollar, and if you contribute enough, they may drop you into a lower tax bracket. This can lower your 2023 tax bill and lead to you getting more money back in your tax refund.

How do you know how much you’ll save from traditional IRA contributions? To generate a rough estimate while you’re preparing your tax return, multiply your marginal tax rate by the amount you put into your IRA. For example, if you have a 24% tax rate for 2023 and contribute the $6,500 maximum, you’d save about $1,560.

Keep in mind, though, that some exceptions can limit the amount you're able to deduct. If you have income over a certain level and you and your spouse have a workplace retirement plan, for example, you won’t be able to get the full deduction.

On the flip side, you may be able to deduct all your IRA contributions up to the limit if you don’t have a workplace plan.

Tax deductions for 2023 IRA contributions

Let’s say you or your spouse are enrolled in an employer retirement plan such as a 401(k). The table below will show you how much the IRS will allow you to deduct based on your modified adjusted gross income (MAGI). If you file separately and didn’t live with your spouse in 2023, the IRS considers you single.

Filing status

Modified adjusted gross income

Deduction

Single or head of household

$73,000 or less

Full deduction up to the amount of your contribution limit

Single or head of household

More than $73,000 but less than $83,000

Partial deduction

Single or head of household

$83,000 or more

No deduction

Married filing jointly or qualifying widow(er)

$116,000 or less

Full deduction up to the amount of your contribution limit

Married filing jointly or qualifying widow(er)

More than $116,000 but less than $136,000

Partial deduction

Married filing jointly or qualifying widow(er)

$136,000 or more

No deduction

Married filing separately

Less than $10,000

Partial deduction

Married filing separately

$10,000 or more

No deduction

Source: IRS

The following table shows the 2023 IRA deduction limits if you and/or your spouse are not covered by a workplace retirement plan.

Filing status

Modified adjusted gross income

Deduction

Single, head of household or qualifying window(er)

Any amount

Full deduction up to the amount of your contribution limit

Married filing jointly or separately with a spouse who isn't covered by a workplace retirement plan

Any amount

Full deduction up to the amount of your contribution limit

Married filing jointly with a spouse who is covered by a workplace retirement plan

$218,000 or less

Full deduction up to the amount of your contribution limit

Married filing jointly with a spouse who is covered by a workplace retirement plan

More than $218,000 but less than $228,000

Partial deduction

Married filing jointly with a spouse who is covered by a workplace retirement plan

$228,000 or more

No deduction

Married filing separately with a spouse who is covered by a workplace retirement plan

Less than $10,000

Partial deduction

Married filing spearately with a spouse who is covered by a workplace retirement plan

$10,000 or more

No deduction

Source: IRS

Opening an IRA typically takes minutes and can be done online or through a brick-and-mortar institution. Once you've opened an account, you can transfer money directly from your bank account up to the contribution limit up to the tax filing deadline. You can also fund your IRA with cash or check, or roll over a 401(k) or an IRA from another provider.

You don't have to fund your IRA all at once — you can set up a contribution schedule so that you contribute a certain amount regularly throughout the year. When you file your tax return, you can then claim a deduction and potentially lower your taxable income.

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