How To Use Your IRA as a Last-Minute Tax Deduction

Shot of a mature woman leaning on her husband while he works on his laptop.
kupicoo / Getty Images

Taxpayers who have earned income and are 49 years old or younger can take an individual retirement account deduction on up to $6,000 of contributions. For those 50 years old or older, the maximum deductible contribution is $7,000. This year’s IRS tax filing deadline is fast approaching. Making an IRA contribution, if you haven’t done so already, could provide some last-minute tax relief.

Chances are good that you are eligible for an IRA deduction. And it might not be too late this year — due to the IRS pushing back the federal tax filing deadline due to complications from the pandemic — your IRA contribution can be made right up until the extended filing deadline of May 17, 2021, and still count as an IRA deduction toward your 2020 taxes.

Below is some more information about IRAs and how they fit into your tax deductions:

What IRAs Are Eligible?

Save for Your Future

There are two main types of IRA accounts that cover the majority of people: the traditional IRA and the Roth IRA.  It’s incumbent on all taxpayers to learn the differences between the two and choose the one that’s right for them. You can make contributions to both a Roth IRA and a traditional IRA at any age.  And it’s easy to use your IRA to get a last-minute deduction, but only if it’s a traditional IRA. Contributions to Roth IRAs are not eligible for tax deductions.

Other types of IRA accounts you might have heard of, such as a SEP IRA, a SARSEP or a SIMPLE IRA, are set up and administered by employers. Although they provide tax benefits, they are not appropriate for last-minute contributions by individual taxpayers.

Back to top

How To Use Your IRA for Tax Deductions

Contributing to a traditional IRA account is a helpful last-minute option that tax filers shouldn’t ignore. After all, when you’re trying to minimize your taxable income at tax time, every deduction counts.

To get the deduction, all you have to do is contribute to your traditional IRA account on or before May 17 this year. But it is important to note that when you make your contribution, you should indicate which tax year the contribution is for because the ability to make contributions for 2021 started Jan. 1 this year.  Avoid confusion by choosing the year for which you’re filing your tax return, which, in this case, would be 2020 if you’re making a last-minute contribution.

Know Your Rate: IRS Tax Brackets — Here’s How Much You’ll Pay in 2021 on What You Earned in 2020 

Back to top

IRA Deduction Limits

For higher-income Americans, the IRA deduction can be limited or disallowed altogether. The amount you can deduct depends on your filing status, adjusted gross income and whether or not you’re covered by an employee retirement plan at work. The tables below can help you determine the amount of your deduction based on the IRA income limits.

Save for Your Future

Here are the traditional IRA deduction limits for taxpayers who have a retirement plan through their employer:

2020 Limitations on Deductions for Traditional IRAs If Covered By a Retirement Plan at Work
Filing Status Modified AGI Deduction Amount
Single or head of household $65,000 or less Full deduction up to the contribution limit
More than $65,000 but less than $75,000 Partial deduction
$75,000 or more No deduction
Married filing jointly or qualifying widow(er) $104,000 or less Full deduction up to the contribution limit
More than $104,000 but less than $124,000 Partial deduction
$124,000 or more No deduction
Married filing separately Less than $10,000 Partial deduction
$10,000 or more No deduction
Source: IRS

The following limits apply to taxpayers not covered by a retirement plan through their employer:

2020 Limitations on Deduction for Traditional IRAs If Not Covered By a Retirement Plan at Work
Filing Status Modified AGI Deduction Amount
Single, head of household or qualifying widow(er) Any amount Full deduction up to the contribution limit
Married filing jointly or separately with a spouse who is not covered by a plan at work Any amount Full deduction up to the contribution limit
Married filing jointly with a spouse who is covered by a plan at work $196,000 or less Full deduction up to the contribution limit
Married filing separately with a spouse who is covered by a plan at work More than $196,000 but less than $206,000 Partial deduction
$206,000 or more No deduction
Married filing separately with a spouse who is covered by a plan at work Less than $10,000 Partial deduction
$10,000 or more No deduction
Source: IRS

Related: What Can I Write Off on My Taxes?

Back to top

Roth IRA Rules and Benefits

A Roth IRA is funded with after-tax dollars. You receive no immediate tax break upfront. But you might be eligible for a tax break the IRS calls the Saver’s Credit if you qualify.

The real benefits of having a Roth IRA come in when you access your funds at or before retirement. The rules regarding Roth IRAs give savers the flexibility to access funds penalty-free in some unique circumstances, including paying college expenses for you and your family, making a down payment on a home purchase and paying medical bills. Another great feature of a Roth IRA is that you can withdraw your contributions tax- and penalty-free if you’re at least 59.5 years old and have had your account for a minimum of five years.

To look at just one example, the Roth IRA is a great savings tool for first-time homebuyers who appreciate having unrestricted access to their money if they need it for a down payment. Many savers look at their Roth IRA as an excellent short-term investment vehicle as well.

Learn More: How To Convert Your 401(k) to a Roth IRA 

Back to top

How Does a Traditional IRA Work?

The goal of all types of IRA contributions — and 401(k) accounts, too — is to leave that money untouched year after year. With a traditional IRA, you can initially avoid paying taxes on the money you put into the plan. For 2019, 2020 and 2021, tax the traditional IRA contribution limit is $6,000 if you are under age 50 and $7,000 if you are 50 or over. These contribution limits represent an increase over what was allowed in 2018.

Considering the fact that the two biggest factors for maximizing the power of compound interest are the interest rate and the length of time your money earns interest, it makes good financial sense to start your contribution now — even if it’s only with a little bit of money — rather than wait. You can open an IRA with your bank or credit union or with a brokerage, but pay attention to any fees involved so you can get the best deal.

In the event you are paying down high-interest credit card debt, consult with a financial advisor for your best course of action to save money and pay down debt as quickly as possible.

Back to top

Don’t Neglect the 401(k)

While you’re calculating your IRA contributions, why not take a moment to consider any 401(k) options you might have. You’ll definitely want to take advantage of a 401(k) if your company offers that valuable benefit. And you should always try to maximize your employer’s match. After all, those funds are free. Understand your company’s vesting schedule, if there is one. And remember that although some plans allow you vested ownership of funds immediately, it could take as many as six years before becoming vested in employer contributions. Try not to think of the matching funds as belonging to you until the funds have fully vested.

Also See: IRA vs. 401(k) — Tips for Choosing the Best Retirement Plan 

Back to top

Start Saving Today

Even if you didn’t save as much as you wanted to in an IRA, 401(k) or another account last year, you can do better in the future by starting today. And if you’re interested in looking ahead, the IRS has already posted the IRA deduction limits for 2021. Just begin making smart investment decisions and saving diligently now. Remember, the IRS sets no minimum contribution for an IRA, so you can get started with any amount. Online brokerage firms such as E-Trade, Betterment and Ally Invest will allow you to open an account with $0. Pick the best IRA for you and start saving.

Back to top

More From GOBankingRates

Cynthia Measom contributed to the reporting for this article. 

Last updated: May 11, 2021

About the Author

Valerie Smith is a writer based in Southern California, specializing in legal, real estate, finance, and aviation topics. Valerie is a commercial pilot, FAA licensed aircraft dispatcher, FAA licensed Advanced and Instrument Ground Instructor, California real estate broker, and certified paralegal. Her work has appeared in numerous publications in print and online. A life-long California resident, Valerie holds a Bachelor of Arts degree from San Diego State University and attended Sheffield School of Aeronautics. 

Untitled design (1)
Close popup The GBR Closer icon

Sending you timely financial stories that you can bank on.

Sign up for our daily newsletter for the latest financial news and trending topics.

Loading...
Please enter an email.
Please enter a valid email address.
There was an unknown error. Please try again later.

For our full Privacy Policy, click here.