How much will you save in taxes if you max out your IRA in 2024?

Contributing to an IRA is a great way to save for retirement. You can open an IRA at any brokerage firm, so you can use this account even if you don’t have access to an employer-sponsored retirement plan. And since IRAs generally offer more investment options than 401(k)s, you can switch to investing your money in an IRA after you’ve contributed enough to your 401(k) to get matching funds provided by your employer. IRA.

One of the biggest benefits of an IRA is that you can deduct the amount you contribute each year on your taxes as long as you meet the income limits (which apply if you or your spouse have another workplace plan). The tax savings help offset the amount you contribute to your IRA, so each contribution doesn’t take a full cut of your actual income.

But how much will you save in taxes if you max out your IRA in 2024? Here’s what you need to know:

This is the potential tax savings for the largest IRA.

The maximum you can contribute to an IRA in 2024 is $7,000, or $8,000 if you are age 50 or older and qualify for supplemental contributions.

The amount you’ll save on taxes if you donate $7,000 or $8,000 depends on what tax bracket you’re in. The table below shows the maximum tax savings you can achieve with your contributions, depending on your marginal tax rate.

Find out which tax bracket you are in so you can see the maximum savings based on your marginal tax rate.

How much can you really save?

To calculate how much you can personally save, you need to know how marginal tax rates work. If you are in the 22% tax bracket, you do not pay 22%. every your income. You only have to pay 22% on any income above the threshold for being included in your tax bracket. For example, married joint filers pay:

• 10% income up to $23,200
• 12% on income between $23,200 and $94,300
• 22% on income between $94,300 and $201,050

And the highest marginal tax rate of 37% applies, which married filers filing jointly pay on income over $731,200.

The tax savings you earn come from deducting (subtracting) the amount you contribute to an IRA from your income and not paying taxes on that amount of income. So if your contributions push you beyond your tax bracket, your savings will be reduced.

For example, let’s say your income is $96,300 and you contributed the maximum $7,000 to an IRA (since you are under age 50). Here’s what it looks like:

• The IRA contribution increases your taxable income from $96,300 to $89,300.
• If you hadn’t made this contribution, you would have paid 22% tax on $2,000 of income ($94,300 plus $2,000, giving you $96,300). So you would save 22% on your $2,000 contribution, or $440.
• Your remaining contribution is $5,000, which reduces your income from $94,300 to $89,300. You will save the 12% tax you would have had to pay on those contributions, or $600.

In this example, your savings would put you above your tax bracket, so your IRA contribution would reduce your tax bill by $1,040.

Read more: Ascent’s Complete Guide to Taxes

Now you understand how this works and can figure out exactly how much you can save by maximizing your IRA. As you can see, the savings are significant. In the example above, you contributed $7,000 but paid $1,040 less in taxes, so your actual income would have been $59.6 million less.

We recommend trying to get as close to your IRA maximum as possible to take advantage of this tax break. If you don’t have an account yet, open one with a top IRA broker today and start contributing as soon as possible to get close to $7,000 or $8,000 in savings over the course of a year.

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