You May Be Able to Lower Your Taxes With a Last-Minute IRA Contribution

With the April 18 tax filing deadline right around the corner, you might be worried it’s too late to save money on your 2022 federal income taxes. But there’s a way you can potentially still lower your tax bill — or even increase your refund — while funding your retirement.

Taxpayers can put money into an individual retirement account, or IRA, for the previous year up until the federal tax deadline. This year, that means you’re able to make 2022 IRA contributions (and possibly use them to decrease your taxable income) until April 18, 2023.

Adding to your IRA has several advantages in addition to potentially reducing what you owe in taxes. Here’s what you need to know about making last-minute IRA contributions.

How to lower your 2022 taxable income with IRA contributions

The maximum you can contribute to all of your IRAs (both traditional and Roth) for 2022 is $6,000, or $7,000 if you’ll be 50 or older by the end of the year. Because some traditional IRA contributions are tax-deductible, you can probably use them to bring down your taxable income for 2022. In turn, you’ll also lower your tax bill or increase your tax refund.

(FYI: Roth IRAs aren’t tax-deductible like traditional IRAs because you devote after-tax money to them. Your earnings in these accounts are tax-free.)

You can estimate your savings from IRA contributions while you prepare your tax return by multiplying your marginal tax rate by the amount of money you contributed. Let’s say your marginal federal income tax rate is 24%: If you contributed the $6,000 maximum to your traditional IRA, you can save about $1,440 in taxes.

There are, however, certain exceptions that can limit how much of your IRA contributions you can deduct. If you or your spouse have a workplace retirement plan like a 401(k) and have income over a certain level, you won’t be eligible for the full deduction. But if you don’t have a workplace retirement plan, you may qualify to deduct all your contributions up to the limit.

See below for details.

Tax deductions for 2022 IRA contributions

If you or your spouse participate in an employer-sponsored retirement plan, this is how much the IRS will allow you to deduct. Note that if you file separately and did not live with your spouse during 2022, you’d be considered single.

These are the 2022 IRA deduction limits if you or your spouse are not covered by a retirement plan at work.

More from Money:

Why Millionaires Don’t Have to Pay Any More Social Security Taxes This Year

How to File Your Taxes for Free With TurboTax This Year

Are You on Track for Retirement? Here’s How Much People in Your Generation Are Saving Now

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