End-of-Year IRA Contributions

Why IRA Contributions Matter at Year-End

Individual Retirement Accounts (IRAs) offer powerful tax advantages that can significantly reduce your current tax bill or build tax-free retirement wealth. While you have until Tax Day (April 15, 2025) to make 2024 IRA contributions, year-end planning helps you optimize your strategy and ensures you don't miss out on these valuable benefits.

Traditional IRA: Immediate Tax Deduction

How Traditional IRAs Work

Contributions may be tax-deductible now, reducing your current year taxable income. Investments grow tax-deferred, and you pay ordinary income taxes on withdrawals in retirement.

Deductibility Rules

Whether your traditional IRA contribution is deductible depends on your income and whether you (or your spouse) are covered by a workplace retirement plan:

Not Covered by Workplace Plan

• Fully deductible: Always, regardless of income
• Best option if you don't have access to 401(k) or similar plan

Covered by Workplace Plan (2024 Phase-Out Ranges)

• Single/Head of Household:
  • Full deduction: MAGI under $77,000
  • Partial deduction: MAGI $77,000 - $87,000
  • No deduction: MAGI over $87,000
• Married Filing Jointly (both covered):
  • Full deduction: MAGI under $123,000
  • Partial deduction: MAGI $123,000 - $143,000
  • No deduction: MAGI over $143,000
• Married Filing Jointly (spouse covered, you're not):
  • Full deduction: MAGI under $230,000
  • Partial deduction: MAGI $230,000 - $240,000
  • No deduction: MAGI over $240,000

Roth IRA: Tax-Free Growth & Withdrawals

How Roth IRAs Work

Contributions are made with after-tax dollars (no immediate deduction), but qualified withdrawals in retirement are completely tax-free. This includes all growth and earnings—potentially decades of tax-free compounding.

Roth IRA Income Limits (2024)

• Single/Head of Household:
  • Full contribution: MAGI under $146,000
  • Partial contribution: MAGI $146,000 - $161,000
  • Not eligible: MAGI over $161,000
• Married Filing Jointly:
  • Full contribution: MAGI under $230,000
  • Partial contribution: MAGI $230,000 - $240,000
  • Not eligible: MAGI over $240,000

Backdoor Roth IRA Strategy

High earners above the income limits can still fund a Roth IRA:

1. Make a non-deductible contribution to a traditional IRA (no income limit)
2. Immediately convert it to a Roth IRA
3. Pay tax only on any earnings (minimal if done quickly)
4. Now you have money in a Roth IRA growing tax-free

Traditional vs Roth: Which Should You Choose?

Choose Traditional IRA If:

• You're in a high tax bracket now and expect lower taxes in retirement
• You need to reduce current year taxable income
• You want immediate tax savings
• You're close to phase-out thresholds for other tax benefits (child tax credit, education credits)
• You expect significant pre-retirement expenses reducing future income needs

Choose Roth IRA If:

• You're in a low tax bracket now and expect higher taxes in retirement
• You're young with decades of tax-free growth ahead
• You want tax-free income in retirement (doesn't affect Social Security taxation)
• You want more flexibility (contributions can be withdrawn anytime tax-free)
• You believe tax rates will increase in the future
• You want to leave tax-free money to heirs

Strategic Year-End IRA Moves

1. Estimate Your Tax Liability

Before contributing, calculate your expected 2024 tax situation:

• Will you owe taxes or get a refund?
• Are you close to a higher tax bracket threshold?
• Do traditional IRA deductions make sense for your income level?
• Would reducing AGI help you qualify for other tax benefits?

2. Consider Tax Bracket Management

Traditional IRA contributions reduce your taxable income, potentially:

• Keeping you in a lower tax bracket
• Qualifying you for other income-based tax credits
• Reducing IRMAA (Medicare premium surcharges) for those approaching age 65
• Lowering state income tax liability

3. Maximize Employer Match First

Before funding an IRA, ensure you're getting the full employer 401(k) match—that's free money with immediate 100% return.

4. Consider Spousal IRA

Even if one spouse doesn't work, you can fund a spousal IRA for them (traditional or Roth) as long as the working spouse has sufficient earned income. This doubles your household's IRA contribution capacity to $14,000-$16,000.

5. Use Bonuses or Windfalls

Year-end bonuses, tax refunds, or unexpected income make excellent IRA contributions. Put found money to work in tax-advantaged accounts.

Contribution Mechanics & Timing

How to Contribute

• Direct contribution: Transfer from checking/savings to IRA
• Payroll deduction: Some employers allow automatic IRA contributions
• Lump sum: Invest full amount at once (better historically)
• Dollar-cost averaging: Spread contributions throughout year

Deadline Flexibility

Unlike 401(k) contributions (must be made by 12/31), IRA contributions for 2024 can be made until April 15, 2025. However:

• Making contributions now gets money working sooner
• You avoid procrastination and potential missed deadline
• Early contributions benefit from additional months of growth
• You can adjust strategy based on final year-end income picture

IRA Contribution Checklist

Common IRA Mistakes to Avoid

Special Situations

Self-Employed Individuals

Beyond traditional/Roth IRAs, consider:

• SEP IRA: Contribute up to 25% of net self-employment income (max $69,000)
• Solo 401(k): Combine employee ($23,000) and employer contributions
• SIMPLE IRA: Good for small businesses with employees

First-Time Homebuyers

Roth IRA contributions can be withdrawn anytime for any reason without penalty. Additionally:

• Can withdraw up to $10,000 earnings penalty-free for first home purchase
• Traditional IRA allows same $10,000 exception (taxes still apply)
• "First-time" defined as no home ownership in past 2 years

Education Expenses

• 10% early withdrawal penalty waived for qualified education expenses
• Applies to you, spouse, children, or grandchildren
• Still owe ordinary income tax on traditional IRA distributions
• Roth contributions always available tax/penalty-free regardless

Long-Term Planning: Growth Projections

Understanding the power of IRA contributions over time: