Tax season is here, but there’s still time to make a smart money move that’s often overlooked by taxpayers eager to file their tax returns and pocket any refunds they’re due: saving for retirement.
One of the most effective ways to lower taxable income is making individual retirement account contributions attributable for the 2025 tax year, which can be done right up until the tax filing deadline of April 15, 2026.
According to the Illinois CPA Society, here’s what to know.
Traditional IRA contributions
Contributions to a traditional IRA are often eligible for a tax deduction, which lowers one’s taxable income and, hopefully, increases their tax refund.
Taxpayers can contribute to a traditional IRA regardless of whether they also contribute to an employer-sponsored 401(k), and 401(k) contributions don’t impact personal IRA contribution limits. For eligible taxpayers, the contribution limit to keep in mind for the 2025 tax year is $7,000 for those younger than age 50 or $8,000 for those age 50 and older. Note that these limits apply to the combination of both traditional and Roth IRA contributions, and the combined contribution amount can’t exceed one’s earned income during the tax year.
Now for the caveat: If either the taxpayer or their spouse is covered by a workplace retirement plan, eligibility for tax-deductible contributions begins to phase out at certain income levels. For the 2025 tax year, a single taxpayer covered by a workplace retirement plan can take a full deduction for their traditional IRA contributions if their modified adjusted gross income is below $79,000, or a partial deduction if their MAGI is between $79,000-$89,000. The tax deduction is eliminated for those with MAGI exceeding $89,000. For a single taxpayer not covered by a workplace retirement plan, a full tax deduction is permitted regardless of MAGI.
For married couples filing jointly, both spouses can deduct the full amount of their traditional IRA contributions if neither is covered by a workplace retirement plan, regardless of joint MAGI. For married couples filing jointly when one spouse is covered by a workplace retirement plan, a full deduction is allowed for the uncovered spouse if joint MAGI is below $236,000, while a partial deduction is allowed if joint MAGI is between $236,000-$246,000, and no deduction is allowed if joint MAGI exceeds $246,000. For the spouse covered by the workplace retirement plan, they can claim a full deduction for their traditional IRA contribution if joint MAGI is less than $126,000, with a reduced deduction allowed for those with joint MAGI between $126,000-$146,000. No deduction is allowed for those with joint MAGI above $146,000.
Self-employed retirement account contributions
Small business owners and the self-employed shouldn’t discount the tax benefits of saving for retirement either. SEP (Simplified Employee Pension)-IRAs can be created by employers and the self-employed and funded with pre-tax contributions, thus lowering taxable income. Of note, the employer must make equal percentage contributions to all eligible employees, not just the business owner, which is why these plans are often favored by business owners that don’t have employees.
For those eligible, SEP-IRAs allow higher contribution limits than traditional IRAs. Contributions to a SEP-IRA can equal the lesser of 25% of the employee’s compensation (25% of net earnings for the self-employed) or $70,000 for the 2025 tax year. In many cases, SEP-IRA contributions for the 2025 tax year can be made as late as Oct. 15, 2026, as the deadline for establishing and funding a SEP-IRA coincides with the employer’s actual tax-filing deadline, including any extensions.
Of course, self-employed taxpayers can also establish other tax-deferred retirement plans, like a 401(k), that offer additional income tax benefits.
The key takeaway? IRAs are great savings vehicles for reducing one’s tax liability, but they have their nuances. When in doubt, know that a CPA can help.
Photo credit: FabrikaCr/iStock
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