Nowadays, it's not enough to simply save money for retirement -- you need to invest it to ensure you reach your financial goals and can live comfortably in retirement. Luckily, there are retirement accounts designed to help you do just that.
If you're at the height of your career, an IRA can work wonders for you.
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A key difference between a traditional and Roth IRA
Traditional and Roth IRAs both serve the same purpose: to provide you with a means to invest your money for retirement. Unlike a 401(k) plan, which is offered through an employer, IRAs must be opened separately, similar to a regular brokerage account. While traditional and Roth IRAs are similar in their intent (saving for retirement), there are vital differences between them.
A large part of the decision-making that goes into choosing between a traditional and Roth IRA is your current tax bracket and your expected tax bracket in retirement. With a Roth IRA, you contribute after-tax money, and tax benefits are reaped on the back end, with the ability for your money to grow and compound tax-free. When you withdraw from a Roth IRA in retirement, you won't owe taxes.
With a traditional IRA, you reap your tax benefits on the front end, with the ability to deduct contributions from your taxable income. As of 2022, the maximum amount you can contribute to an IRA -- both Roth and traditional -- is $6,000 ($7,000 if you're 50 or older).
Your income matters
How much of your contributions you can deduct depends on your income and whether you're covered by a retirement plan by your employer. If you are covered by a retirement plan at work, here's how much of your traditional IRA contributions you can deduct:
| Tax Filing Status | Income | Deduction Allowed |
|---|---|---|
| Single | $68,000 or less | Full amount |
| Single | $60,801 to $77,999 | Partial amount |
| Single | $78,000 or more | No deduction allowed |
| Married, filing jointly | $109,000 or less | Full amount |
| Married, filing jointly | $109,001 to $128,999 | Partial amount |
| Married, filing jointly | $129,000 or more | No deduction allowed |
| Married, filing separately | Less than $10,000 | Partial amount |
| Married, filing separately | $10,000 or more | No deduction allowed |
Data source: IRS.
If you are not covered by a retirement plan at work, here's how much of your traditional IRA contributions you can deduct:
| Tax Filing Status | Income | Deduction Allowed |
|---|---|---|
| Single | Any amount | Full amount |
| Married, filing jointly or separately (with a spouse not covered by a work plan) | Any amount | Full amount |
| Married, filing jointly (with a spouse that is covered by a work plan) | $204,000 or less | Full amount |
| Married, filing jointly (with a spouse that is covered by a work plan) | $204,001 to $213,999 | Partial amount |
| Married, filing jointly (with a spouse that is covered by a work plan) | $214,000 or more | No deduction allowed |
| Married, filing separately (with a spouse that is covered by a work plan) | Less than $10,000 | Partial amount |
| Married, filing separately (with a spouse that is covered by a work plan) | $10,000 or more | No deduction allowed |
Data source: IRS.
What's the best time to take the tax benefit?
If you're at the height of your career, it's better to take the tax advantage now, when it's most valuable, versus later down the road, when its value has potentially dropped. For example, if you're in your peak earning years and your current tax bracket is likely the highest one you'll be in, you'd want to consider contributing to a traditional IRA now (taking the deduction if you're eligible) and then paying income taxes on your withdrawals in retirement, when your tax bracket is lower.
Unfortunately, you'll never get out of paying taxes -- that's just how it goes. But what you can do is be strategic with your retirement savings to ensure you pay the least amount of taxes possible, keeping more money in your pocket.
