Should I Maximize My IRA Contributions?

  • Home
  • Should I Maximize My IRA Contributions?

Do you have an IRA? If so, you have an excellent opportunity to create tax-deductible contributions that, combined with tax-deferred earnings, can provide exponential growth over the decades. So, now you’re likely asking yourself: “Should I Maximize My IRA Contributions?”. Yes, no, maybe – like everything with investing – it depends. But don’t worry; we’re here with some general guidelines to help you make the right decision. And if you’re still unsure by the end of this article, reach out to us for help! That’s why we’re here, after all.  

But before we get into the details, you need to know how much you can contribute to your IRA in 2024. And if you’re reading this before the 2023 tax filing deadline of April 15th, you still have time to maximize your IRA contributions! 

In 2024, you can contribute $7,000 to your IRA. If you’re 50 or over, you can contribute $8,000. You’ll have until April 15th, 2025, to take advantage of 2024 deductions. 

In 2023, you can contribute $6,500; if you’re 50 or over, $7,500. At the time of publication, we’re barreling towards the deadline, so we recommend not delaying reaching out for assistance to determine if you should maximize your 2023 IRA contributions. 

Now, the true question – should you actually maximize your IRA contributions, or would those funds serve you better elsewhere? Let’s go over some key reasons when maxing out your IRA would be beneficial – and when it’d be detrimental.

Key Takeaways: 

  • Maxing out IRA contributions can lead to compound growth, but it may not be the best option if you have high-interest debt or lack an emergency fund.
  • Tax benefits of IRA contributions depend on your income, filing status, and workplace retirement plan.
  • Traditional and Roth IRAs have different tax advantages and income limitations. Understanding these differences can help you optimize your retirement savings.

You Need the Tax Deduction

Taxes are expensive, taxes are a pain, and everybody feels they pay too much. When you contribute to a Traditional IRA, you can subtract that contribution from your taxable income, thereby reducing your tax bill for the year. And here’s the real kicker – you may even drop a tax bracket due to your IRA contribution. 

Here’s how it works:

Let’s imagine your taxable income as a single filer is $198,900 (we’ll ignore other tax implications to simplify our example). You are just above the tax bracket threshold for a 32% tax rate. You contribute $7,000 to your IRA; now your taxable income is only $191,900. Congratulations! You’ve dropped from a ridiculously high tax rate of 32% down to 24% and saved around $2,200 in taxes

Plug that into an ETF with a 10% rate of return, and you’ll more than double your tax savings in just ten years! 

Keep in mind that the U.S. tax system uses marginal rates, meaning only the income within a particular bracket is taxed at that bracket’s rate. So, dropping down to 24% doesn’t mean all the income is taxed at 24%, just the income within the 24% bracket’s thresholds.

Unfortunately, not everyone qualifies for tax-deductible IRA contributions. If you have a workplace retirement plan, there will be limitations on how much you can deduct. These are referred to as ‘phase-out limitations’; basically, the more you earn, the less you’ll be able to deduct, and once you hit a certain threshold, you won’t be able to deduct your IRA contribution. 

Here are the 2023/2024 Phase Out Thresholds: 

  • Single or Head of Household Filers:
    • For 2023: The phase-out starts at $73,000 and ends at $83,000.
    • For 2024: The phase-out starts at $77,000 and ends at $87,000.
  • Married Filing Jointly:
    • For 2023: The phase-out starts at $116,000 and ends at $136,000.
    • For 2024: The phase-out starts at $123,000 and ends at $143,000.

You don’t qualify for a deduction if you earn more than those ending figures. However, just because you don’t qualify for deductions doesn’t automatically disqualify you from contribution. In fact, it may make sense to contribute under certain circumstances, such as if you’d like to execute a Roth conversion. However, such strategies are exceedingly complex, so it’s highly recommended that you seek the advice of a professional before embarking on such an endeavor.

You Want To Reduce Taxes in Retirement

Traditional IRA contributions give you a deduction now, but you’ll have to pay taxes on your contributions and earnings upon withdrawal. If you’d rather get taxes out of the way now, consider contributing all or a portion of your IRA savings to the Roth IRA. The Roth IRA has the same contribution limits as the Traditional IRA. However, you can’t claim a tax deduction in the contribution year. Instead, you pay taxes first, and your contributions can grow tax-free. Even your withdrawals will be tax-free as long as you adhere to Roth regulations. You may be hit with taxes and a penalty if you make early withdrawals. 

Your Roth account also won’t burden you with Required Minimum Distributions (RMDs) once you hit a certain age. You can let your contributions grow as long as you like and even leave your beneficiaries a tax-free gift. 

However, like the Traditional IRA, the Roth comes with its own limitations.

For single tax filers, the maximum modified adjusted gross income (MAGI) to contribute to a Roth IRA is $153,000 in 2023, with a 2024 increase to $161,000

If married and filing jointly, the MAGI limit is $228,000 in 2023, with a rise to $240,000 in 2024.

If you earn more than those amounts, you can conduct a Backdoor Roth Conversion to obtain the same tax benefits as a Roth. However, as mentioned above, this is a complicated process with potentially negative immediate tax consequences, so consultation with a professional is necessary.

You Want Maximum Tax Diversification

Each retirement account has its own tax status, so it makes sense to utilize every account available to you to achieve maximum tax diversification. Doing so will give you greater flexibility in your withdrawal process and the ability to manage your tax brackets, now and in the future. Having multiple accounts also lets you choose what kinds of assets you want to purchase within each account, enabling you to align the tax status of investments with an account that correspondingly correlates. 

Creating a comprehensive plan that considers the tax implications of both your traditional and Roth accounts will reduce the overall net tax drag on your investments, allowing them to generate compound gains faster than they otherwise would. 

When NOT to Maximize Your IRA

Depending on your circumstances, it may not be optimal for you to maximize your funds because they could serve you better elsewhere. 

You Have a 401(K) (or other workplace retirement plan)

As we already alluded to, having a workplace retirement plan will reduce the deductibility of your IRA contributions. So, any contributions you make have to be carefully considered and calculated to ensure they make sense. Perhaps your funds would suit you better in a brokerage account, your 401(K), or somewhere else entirely.

You Have High-Interest Debt

The S&P 500’s average rate of return is about 10%. The average credit card interest rate in 2024 is… 27.94%. So why, oh why, would you contribute even a penny to your IRA before extinguishing that debt? Your credit card interest rate is likely to easily outpace your investment returns. 

If you have low-interest debt, such as a mortgage, your investments are likely to beat out that interest rate over the long term. However, if you have multiple low-interest debts, you should sit down with a financial advisor to craft a plan to tackle your debt while creating some long-term savings in a way that makes financial sense.

You Don’t Have an Emergency Fund

To be on the safe side, it’s recommended that you have three to six months of your salary in liquid assets readily available in case of an emergency. If your savings are wrapped up in an IRA or another retirement or investment account, you’ll potentially be faced with tough decisions, such as selling off assets at a suboptimal time, unexpected tax consequences, and even early withdrawal penalties. 

Final Thoughts

Maxing out your IRA contributions can be a great way to boost your retirement savings, but it’s not always the right move for everyone. While the tax benefits are definitely appealing, other factors like existing debt and emergency funds may make it less desirable to contribute the maximum amount right now. Additionally, your income level and workplace retirement plans can also impact the tax advantages of IRA contributions.

If you’re unsure how to optimize your retirement savings, our team of financial professionals is here to help. We understand that everyone’s financial situation is unique, and we’ll work with you to create a personalized plan that fits your needs. Don’t hesitate to reach out for guidance on building a more secure financial future. 

Please Note: The information contained in this article is general in nature and for educational purposes only. Cornerstone Financial Services Group does not provide tax advice and one should always consult with their tax professional regarding their specific situation.

You are leaving this website.

Before you proceed, we would like to alert you that you are navigating away from this website to access another website that offers fixed insurance and brand marketing.


Financial Planning