Tax-Free Income Through IRAs: What You Need to Know

Believe it or not, there are ways to convert taxable income into non-taxable income, without triggering any red flags with the IRS.

One of the best tools for this has been part of the tax code for decades, but many people still aren’t fully leveraging its benefits.

I’m talking about Individual Retirement Accounts—better known as IRAs.

Before you brush it off thinking you know all there is to know about IRAs, let me share three essential benefits that could save you thousands in taxes.

Benefit #1: Avoiding Tax vs. Postponing Tax

Did you know there are two types of IRAs available today?

The Traditional IRA has been around since the 1970s and allows you to make tax-deductible contributions. This reduces your taxable income for the year, and your investment grows tax-deferred. However, when you withdraw funds in retirement, those distributions are taxed as ordinary income.

The newer version—the Roth IRA—works differently. With a Roth IRA, contributions are made with after-tax dollars, so you don’t receive an immediate tax deduction. But here’s the big benefit: your investments grow tax-free, and qualified withdrawals (made after age 59½ and after the account has been open for at least five years) are entirely tax-free.

Let’s break this down with an example:

• You contribute $2,000 annually to a Roth IRA for 20 years, totaling $40,000.
• Assuming an average return of 10%, your investment grows to $126,005.
• When you withdraw that money in retirement, the full $126,005 can be taken tax-free, provided you meet the age and account duration requirements.

In contrast, if this had been a Traditional IRA, the full amount would be taxed upon withdrawal. At a 15% tax rate, that’s a potential savings of over $12,000—money that stays in your pocket.

Benefit #2: Extra Time to Contribute

One lesser-known advantage of IRAs is the extended contribution window.

For any given tax year, you have until Tax Day (typically April 15th of the following year) to make contributions. For example, for tax year 2024, you have until April 15, 2025, to fund your IRA.

This gives you extra time to maximize contributions, even if you couldn’t invest by the end of the calendar year.

Benefit #3: Higher Contribution Limits

IRA contribution limits have increased significantly over the years. As of 2024:

• Individuals under 50 can contribute up to $7,000.
• Individuals aged 50 and over can contribute $8,000 (including a $1,000 catch-up contribution).

For married couples, this means potentially saving $14,000 to $16,000 annually in tax-advantaged accounts.

Income Limits for Roth IRAs (2024):

• Single filers: Contribution eligibility begins to phase out at $146,000 and is fully phased out at $161,000.
• Married couples filing jointly: Phase-out starts at $230,000 and ends at $240,000.

If your income exceeds these limits, there are still strategies like the backdoor Roth IRA that allow high earners to convert Traditional IRA funds into a Roth.

Start Where You Can

I get it—saving thousands a year might feel out of reach, but even small contributions make a difference. If budgeting is an issue, take the first step by identifying areas to adjust.

Even if you can’t max out your IRA this year, start somewhere. Consistent contributions, no matter how small, will grow over time—and when you’re ready to retire, you’ll thank yourself for making the effort.

Tax laws and contribution limits may change, and it is advisable to consult with a tax professional or financial advisor for the most current information. This is for informational purposes only and does not constitute financial advice.