If You Do One Thing Before Filing Taxes, Do This to Maximize Your Refund

There aren't many strategies you can use to save money on your taxes after the end of the year. But one big way to save on 2023 taxes -- even though it's already 2024 -- is by taking advantage of the traditional IRA deduction. So let's take a closer look at what you need to know.

What's an IRA?

Individual retirement accounts, or IRAs, come in two different varieties -- traditional and Roth. Both can be excellent ways to save for retirement, and while there are a few differences, the biggest is the tax treatment. Traditional IRA contributions can be deducted in the year they're made, but eventual withdrawals in retirement are treated as taxable income, while Roth IRA contributions aren't deductible, but qualified withdrawals are completely tax free.

In simple terms, traditional IRAs are usually the better choice for people who want to save money on their taxes now, while Roth IRAs are best for those who have relatively low taxes now and would prefer tax-free income in retirement.

The traditional IRA deduction

For 2023, Americans can contribute as much as $6,500 to their IRA, or $7,500 if the account owner is 50 or older. But one key point is that you can make 2023 contributions until the April 15 tax deadline. So, you still have time to get them in.

If you qualify, you can deduct traditional IRA contributions on your tax return. If you don't have a retirement plan at work, you definitely qualify. If you do (or your spouse does) have a retirement plan at work, your eligibility depends on your income. So, be sure you qualify before you make your contribution.

If you don't already have an IRA, opening one is easy. Check out some of our top IRA brokers to see which might be the best fit for you. Or, if you really want to keep your retirement investing simple, consider a robo-advisor, which will automatically choose an appropriate investment portfolio for you.

How much can you save?

The exact savings you can get depends on a few factors -- mainly the amount of your IRA contribution and your marginal tax rate (tax bracket).

As an example, let's say that you put the $6,500 max into a traditional IRA for the 2023 tax year. Assuming that you qualify for the traditional IRA deduction, this could mean an additional $1,430 on your tax refund if you're in the 22% tax bracket.

You can take advantage even if you've already filed your taxes, too. Let's say that you've already filed your 2023 tax return by the time you're reading this, but you haven't made IRA contributions yet. That doesn't necessarily mean you're out of luck.

The IRS allows taxpayers to file an amended tax return if something changes with your tax situation, and being able to claim an IRA deduction certainly counts. In other words, you can still contribute to an IRA for 2023 and file an amended return to claim the deduction (and the additional tax refund you'd be entitled to) if you qualify. In fact, as long as you make your contribution by the tax deadline, you can file an amended return anytime before the IRS statute of limitations expires (usually three years after you initially file.

The deduction is only half of it

As a final thought, contributing to a traditional IRA can be extremely rewarding in two big ways. We've already discussed the annual tax benefits, but there's also the power of long-term, tax-deferred compounding in an IRA.

We won't get into how you should invest in an IRA in this article or the best way to do it. But over long periods of time, the stock market as a whole has produced annualized total returns of about 10%.

Consider this example. Let's say that you contribute $6,500 to an IRA in 2023 and your investments simply match the historical returns of the stock market over time. After 30 years, you could have more than $113,000 -- and that assumes just a one-time $6,500 contribution. Imagine what could happen if you made an IRA contribution and invested the money every year.