With the last day of April 15, 2025, for the submission of tax returns coming up soon, Americans still have the opportunity to reduce their tax bill — probably as much as $1,540 — by making a simple and rarely used maneuver.
Even after the start of the new year, everyone has the chance to pay the 2024 tax for the Traditional IRA. It turns out that someone can open an IRA in 2025 and make the 2024 contribution. Also, one has a very short time-frame as this opportunity ceases to exist after Monday, April 15, which is the official closing of the tax season.
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How Could It Benefit Me?
A Traditional IRA is a retirement savings account that might make you eligible for a tax deduction on your income and, thus, lower the amount of taxes payable. This implies that the money an individual puts into it could lower the amount he/she owes serious money to the IRS.
For the 2024 tax year:
- Those not exceeding the age of 50 can contribute up to $7,000
- 50-years-olds to a lesser extent can still maximally contribute $8,000 (including a $1,000 catch-up contribution)
The example here means that were you to be in the federal tax bracket of 22%, the contribution of $7,000 would allow you to save $1,540 in taxes since 22% of $7,000 is tax. (Vanguard)
Who Can Get This Tax Advantage?
Yet, the opportunity to those who can deduct the full IRA contribution is not available for everybody. It heavily relies on:
- Your income.
- Whether you or your spouse has a retirement plan through work.
- Your tax filing status.
If neither you nor your spouse have a workplace plan, you can generally go for a full deduction. On the other hand, if only one of you does, then the deduction starts to phase out at relatively higher income levels.
If you’re interested in knowing your deduction limits, you can go through the IRS’s IRA deduction guide.
The Reasons Why You Should Do It Now, At The Last Minute
Now that there is hardly any time left before the deadline, if you set aside some money for a Traditional IRA, it is one of the legal methods to reduce your taxes for the period just ended. Furthermore, the money you are putting into a retirement fund now can be later taken out and used for your living expenses. No doubt, it’s a real double-win situation.
Besides, if your contribution results in a total income falling below a certain amount, you are possibly eligible to apply for tax credits and postpone penalties for underpayment. Depending on the circumstances, you could also expect the refund to be increased from the tax authorities.
The way the contribution can be made
Most people tend to think that it is a complicated process; however, it is very straightforward. One of the biggest firms in the financial world like, for instance, Fidelity, Vanguard, or Charles Schwab, can help you open an account or transfer/ fund an account there online in just around 10 minutes.
The transfer is normally made via any bank account which you have access to, and in case you deposit it before April 15, it is valid for your 2024 return. Make sure you request for the contribution to be for the previous year that is 2024 and not 2025.
Whether There Are Any Restrictions?
Indeed, the availability of the contribution-based deductible varies according to whether you or your spouse or both are enrolled in a 401(k) plan or a different employer’s retirement scheme. If your MAGI is over the eligibility range, then your deduction is neither wholly nor partially granted.
Moreover, high earners might not get a deduction in any case, but they still may invest for long-term retirement growth. If the deduction is not for you, a Roth IRA is a good alternative.
Final Date and Following Actions
The final date which is voted last day to take advantage of this tax break is Monday, April 15, 2025. After that, only contributions for the 2025 tax year will be accounted for.
If you have not yet done your taxes or made your Traditional IRA contribution, now is the time. Even if you file for an extension (using Form 4868), you must still contribute by April 15 for it to count toward your 2024 taxes.
You may estimate your savings by multiplying your contribution amount by your marginal tax rate. And if you are not sure, you could talk to a tax advisor.
