3 Ways to Lower Your Tax Bill in 2024 (and How to Navigate Those Weird Rollover IRA Forms) — Millennial Money with Katie

The Traditional IRA and a few related fun formz

If you (and your spouse, if you have one) are not covered by employer-sponsored retirement plans at work (read: a 401(k) or 403(b), most likely), you can each contribute up to $6,500 to your own Traditional IRAs for the 2023 tax season. 

That’s up to $13,000 you can wipe right off the top of your taxable income, if both partners contribute the full amount to their respective IRAs.

A minor point of clarification for couples with combined finances: These are intended to be individual retirement accounts, so there’s no such thing as a “joint” IRA.

How do I calculate the tax savings I’ll score from contributing to the Traditional IRA?

For example, if you and your spouse are in the 24% marginal tax bracket after other deductions and you both contribute the maximum allowed, that’s a joint tax savings of approximately $3,120 (a calculation we arrive at by multiplying our contribution, $13,000, by our marginal tax rate, 24%). 

This means if you owed the IRS, say, $1,500, this one move would wipe out that tax liability, and probably generate a refund, too.

But here’s how your income may thwart your plan to deduct your contributions

Straight from the mouths of our boiz of the IRC, here are a few income limits and phaseout scenarios to be aware of for the 2023 tax season:

If you ARE covered by a workplace retirement plan…

  • A single taxpayer (or head of household) begins to phase out of being able to take a deduction for their contribution when their MAGI (Modified Adjusted Gross Income) exceeds $73,000, and is totally ineligible for a deduction once they earn more than $83,000

  • A married couple filing jointly begins to phase out of being able to deduct their contribution when their MAGI (We Three Kings, baby!) exceeds $116,000, and is totally ineligible for that sweet, sweet deduction once they earn more than $136,000 

If you are NOT covered by a workplace retirement plan, but your spouse is…

  • A married couple filing jointly, where you are not covered by a workplace plan (but your spouse is!) begins to phase out at a MAGI of $218,000 and is totally ineligible once MAGI exceeds $228,000

And if you’re married filing separately, good luck—you can’t earn more than $10,000. (I know, I don’t get it, either.)

When this won’t work

To put a finer point on this one, this can only be leveraged to the hilt if you both aren’t covered by retirement plans at work. 

Also note that you’re only allowed to contribute a maximum of $6,500 across your Traditional and Roth IRAs, so this won’t work if you’ve already contributed the maximum for 2023 (even if you were contributing to a Roth IRA, not a Traditional—but if you contributed, say, $3,000 to a Roth IRA, you’d have $3,500 left that’s fair game to contribute to either). 

Fortunately, if you are covered by a plan at work and not eligible to consider a deductible Traditional IRA contribution, you can still contribute up to $6,500 to a Roth IRA (with some income limitations; here’s a video about how to get around those), though that won’t lower your taxes this year. 

You can open a Traditional or Roth IRA at pretty much all major brokerage firms; I prefer roboadvisors for ease of use (think Betterment, M1 Finance, etc.), but if you choose to take the DIY route, remember to invest the cash you contribute. I know way too many smart people who opened an IRA, funded it, and never invested the cash, so it just sat there…for years…uninvested. We have an episode about indices to consider when you’re building a diversified portfolio.

If you make excess deductible contributions, you’ll get prompted with a message (in TaxAct, at least!) that looks like this.

This screen grab is from the 2022 tax season.