Want a bigger tax refund? Save for retirement

CHICAGO, Feb. 7, 2024 – Tax season is officially underway, but there’s still time to make a smart money move that’s often overlooked by taxpayers eager to file their tax returns and pocket any refunds they’re due: saving for retirement.

For those looking to lower their tax bills and improve their financial positions for 2024 and beyond, making individual retirement account (IRA) contributions for the 2023 tax year—which can be done right up until the income tax filing deadline of April 15, 2024, in most cases- makes sense. Here’s what to know.

Contributing to traditional IRAs

Contributions to a traditional IRA are often eligible for a full or partial tax deduction, which would lower one’s taxable income and, hopefully, increase their tax refund. Eligibility ultimately depends on the taxpayer’s earned income level and other factors, such as whether they—or their spouse—are covered by an employer-sponsored 401(k) or other workplace retirement plan.

Taxpayers can contribute to a traditional IRA regardless of whether they also contribute to an employer-sponsored 401(k), and 401(k) contributions do not affect limits on the IRA contributions. However, if either the taxpayer or their spouse is covered by a workplace retirement plan, eligibility for tax deductible contributions begins to phase out at certain income levels.

For eligible taxpayers, the contribution limit to keep in mind for the 2023 tax year is $6,500 for those younger than age 50 or $7,500 for those age 50 and older (the latter are eligible for catch-up contributions). Note that this limit applies to the combination of both traditional and Roth IRA contributions, and the combined contribution amount cannot exceed one’s earned income for the tax year.

For the 2023 tax year, a single taxpayer covered by a workplace retirement plan can take a full
deduction for their traditional IRA contributions if their modified adjusted gross income (MAGI) is below $73,000, or a partial deduction if their MAGI is between $73,000 and $83,000. The tax deduction is eliminated for those with MAGI of more than $83,000. For a single taxpayer not covered by a workplace retirement plan, a full tax deduction is permitted regardless of MAGI.

For married couples filing jointly, both spouses can deduct the full amount of their traditional IRA contributions if neither is covered by a workplace retirement plan regardless of joint MAGI.

For married couples filing jointly when one spouse is covered by a workplace retirement plan, a full deduction is allowed for the uncovered spouse if joint MAGI is $218,000 or less, while a partial deduction is allowed if joint MAGI is between $218,000 and $228,000, and no deduction is allowed if joint MAGI is more than $228,000. For the spouse covered by the workplace retirement plan, they can claim a full deduction for their traditional IRA contribution if joint MAGI is less than $116,000, with a reduced deduction allowed for those with joint MAGI between $116,000 and $136,000. No deduction is allowed for those with joint MAGI above $136,000.

Contributing to self-employed retirement accounts

Small business owners and the self-employed shouldn’t discount the tax benefits of saving for
retirement, either. SEP (Simplified Employee Pension) IRAs can be created by employers and the self-employed and funded with pre-tax contributions. Of note, the employer must make equal percentage contributions to all eligible employees, not just the business owner, which is why these plans are often favored by business owners that don’t have employees.

For those eligible, SEP-IRAs allow higher contribution limits than traditional IRAs. Contributions to a SEPIRA cannot exceed the lesser of 25% of the employee’s compensation (25% of net earnings for the self-employed) or $66,000 for the 2023 tax year. In many cases, SEP-IRA contributions for the 2023 tax year can be made as late as Oct. 15, 2024, as the deadline for establishing and funding an SEP-IRA coincides with the employer’s actual tax-filing deadline, including any extensions.

Of course, self-employed taxpayers can also establish other tax-deferred retirement plans, like a 401(k), that offers income tax benefits.

The key takeaway? IRAs are great savings vehicles for reducing one’s tax liability, but they have their nuances. When in doubt, know that a CPA—a certified public accountant—can help. The Illinois CPA Society reminds taxpayers that while everyone’s financial situation and tax position is different, CPAs can help taxpayers strategically manage their taxes and personal finances during tax season and beyond.

The Illinois CPA Society’s free “Find a CPA” directory can help taxpayers find the trusted, strategic advisor that’s right for them based on location, types of services needed, and languages spoken. Find your CPA at www.icpas.org/findacpa.