IRA Tax Deductions: How Much Can an IRA Reduce My Taxes?

An IRA is a widely available and straightforward option for reducing your taxable income since most people with earned income can open and contribute to one. 

Your contribution to a Traditional IRA could be tax deductible, depending on your income and workplace plan participation. In 2025, qualified individuals can contribute up to $7,000 if you’re under 50 years of age or up to $8,000 if you’re age 50 or older. If you also participate in an employer-sponsored plan like a 401k, your ultimate deduction amount could be more limited.

In this article, we’ll look at how to explore maximizing tax deductions through an IRA, eligibility rules, and how it compares to other retirement accounts.

How IRA Tax Deductions Work

In both 2024 and 2025, the contribution limits for an IRA are:

📝 Note: Only contributions to a Traditional IRA are tax deductible assuming you are below the income threshold. Contributions to a Roth IRA are made with after-tax dollars and do not lower your taxable income.

Traditional vs Roth IRA

Here’s how Traditional and Roth IRAs differ in terms of taxes:

✅ Traditional IRA: Contributions are made with pre-tax income and can be deductible from your taxable income. However, withdrawals in retirement are taxed as ordinary income.

✏️Hypothetical Example: If you made $30,000 this year and contribute $5,000 to your Traditional IRA, generally your taxable income is ~$25,000. 

✅ Roth IRA: Contributions are made with after-tax income, meaning they are not tax deductible. However, withdrawals in retirement are generally tax-free.

✏️ Hypothetical Example: If you made $30,000 this year, you would still pay taxes on the entire $30,000 amount of income, and then contribute some of your after-tax funds to your Roth IRA. 

📌 Also read: Roth vs Traditional IRA

Contribution Limits Apply Across All IRAs

Your IRA contribution limit is combined across all of your IRAs, meaning the total contributions to all of your IRAs must not exceed the annual IRA contribution limit. So if you have both a Traditional IRA and a Roth IRA, your total contribution across both cannot exceed $7,000 in 2024 and 2025 ($8,000 if age 50 and older).

✏️ Hypothetical Example: If you’re under 50 years of age and you contribute $2,000 to a Roth IRA this year, you can only contribute $5,000 to your Traditional IRA. To qualify for the full tax deduction, your entire IRA contribution must be made to a Traditional IRA.

When Can’t You Get an IRA Tax Deduction? 

While anyone with earned income can contribute to a Traditional IRA, you may not qualify for a tax deduction if: 

❌ You also participate in an employer-sponsored plan (like a 401k).
❌ Your income is too high to qualify for the full deduction.

IRA Tax Deduction Limits

If you have a 401k at work, the amount of your Traditional IRA tax deduction ultimately depends on your modified adjusted gross income (MAGI).

Traditional IRA tax deduction limits for 2024:

✅ Full deduction up to $7,000 (or $8,000 if age 50) if MAGI is $77,000 or less
✅ Partial deduction if MAGI is between $77,000 and $87,000
✅ No deduction if MAGI is over $87,000

Traditional IRA tax deduction limits for 2025:

✅ Full deduction up to $7,000 (or $8,000 if age 50) if MAGI is $79,000 or less
✅ Partial deduction if MAGI is between $79,000 and $89,000
✅ No deduction if MAGI is over $89,000

However, if you are married filing separately and covered by a retirement plan at work, the deduction for traditional IRA contributions starts to phase out at a much lower income level. You can’t claim any deduction if your MAGI is at $10,000 and higher. 

📝 Note: To get the full deduction, your MAGI must be below the cutoff for the year. You can check IRS Publication 590-A for details on how to calculate your MAGI.

How Much Do I Need to Earn to Max Out My IRA?

You can contribute up to 100% of your earned income into a Traditional IRA, up to the contribution limit.

✅ In 2024, you need to earn at least $7,000 ($8,000 if at least 50 years of age).
✅ In 2025, you also need at least $7,000 ($8,000 if at least 50 years of age).

If you earn less than these amounts, you can contribute only up to your earned income for the year.

How to Report IRA Tax Deductions to the IRS

If you qualify for an IRA tax deduction, simply report the deduction on Schedule 1, Line 20 of Form 1040.

If you’re not eligible for a tax deduction but still contributed to your IRA, report them using Form 8606.

When Can I Withdraw from a Traditional IRA?

You can start to take qualified distributions from your Traditional IRA when you reach the age of 59½. Qualified withdrawals have no penalties but are taxed as ordinary income according to your tax bracket and tax rates at the time of withdrawal.

If you make an early withdrawal before the age of 59 1⁄2, you will generally face a 10% early distribution penalty plus income taxes on the withdrawn amount.

With a Traditional IRA, you’re required to start taking RMDs (required minimum distributions) at age 73. That means you can let your money grow tax-deferred beyond the eligible withdrawal age of 59 ½.

📝 Note: Once you turn 73, the IRS requires you to take RMDs every year until your account is fully withdrawn. Missing an RMD deadline could lead to IRS penalties, so it’s important to understand the withdrawal rules.

Which Retirement Plans Offer Bigger Tax Deductions Than an IRA?

If you need higher contribution limits than those available in an IRA, consider these options (additional qualifications may apply):

✅ 401k (Employer-Sponsored Plan)

✅ Solo 401k (For Self-Employed Individuals)

Note that a Solo 401k could offer larger tax deductions, which may be a more suitable option for self-employed individuals who want higher contribution limits.

📌 Also read: IRA vs Solo 401k