Are IRA Contributions Pre-Tax?

There are many ways to save for retirement, but one of the best is to get an individual retirement account (IRA). These are especially useful if you don’t have access to a workplace retirement account, like a 401(k) or 403(b). An IRA is essentially a shell into which you deposit and invest money for the purpose of growing your retirement savings. Workplace retirement accounts are generally filled with pre-tax money. But with IRAs, this tax question depends on which type of IRA you decide to open. For help managing your retirement plans, consider working with a local financial advisor.

Traditional IRA Taxes

A traditional IRA is, as the name implies, the original type of IRA. Traditional IRAs are tax-deferred, meaning that you don’t pay taxes on the money you put into the account, making it a “pre-tax” account. However, you’ll eventually pay taxes on the distributions you take from the account in retirement. Taking distributions before 59.5 will result in a 10% tax penalty from the IRS.

Unlike with a 401(k), you do technically put money into the account after you’ve paid taxes on it. So instead, you can then deduct all contributions on your tax return at the end of the year. For 2023, traditional IRA account holders can contribute up to $6,500 over the course of a year ($7,000 in 2024). If you’re age 50 or older, though, the IRS lets you make “catch-up” contributions of up to an additional $1,000.

Roth IRA Taxes

For the most part, a Roth IRA operates similarly to a traditional IRA. You start by putting money into the account, investing and letting it grow and eventually taking out distributions when you retire. Roth IRAs also have the same contribution limits as traditional IRAs, allowing contributions of $6,500 per year, unless you’re over 50, in which case you can contribute up to $7,500.

The major difference between Roth and traditional accounts, though, is that Roth IRA deposits are already taxed and not deductible on your tax return. But that means when you’re ready to take the money from your account, it won’t be taxed. This is understandably an appeal proposition for most people.

For the 2023 tax year, there are also income limits that determine how much you can contribute to a Roth IRA. If you’re single, you can contribute the full amount if you earn $138,000 annually or less. But if you earn between $138,000 and $153,000, you can contribute a lesser amount, with earners over $153,000 not being allowed to contribute.

For a married couple who files jointly, total earnings of up to $218,000 allow you to contribute the full amount. Between $218,000 and $228,000, a partial contribution is allowed. With earnings of more than $218,000, no Roth IRA contributions are allowed.

Traditional IRAs vs. Roth IRAs: Which Tax Setup Is Best for You?

There are positives and negatives to the tax implications of both traditional and Roth IRAs. With a traditional IRA, you get to defer taxes until retirement, which increases your account’s growth potential in retirement. Then, when you are likely to be in a lower tax bracket as a retiree, you begin taking withdrawals. In some states, retirement income actually isn’t subject to any income tax at all.

With a Roth IRA, on the other hand, you get a better sense of exactly how much money you’ll have for retirement without having to factor in taxes. This can allow for simpler planning and a more concrete strategy for planning your eventual retirement lifestyle. Also, the perk of not having to factor taxes into your withdrawal plans has major benefits.

Bottom Line

Whether or not money put into an IRA is taxable depends on which type of IRA you open. With a traditional IRA, the money avoids taxes now, but you will owe taxes on the withdrawals you take from the IRA in retirement. On the other hand, with a Roth IRA, you’ll put money in after taxes, with no taxes on your distributions.

Which type of IRA is right for you depends on your goals and future trajectory. Beyond that, building a retirement plan is a very personal process. If you have questions about how the specifics of your financial situation should govern which type of IRA you open, think about working with a financial advisor.

Retirement Planning Tips

It’s important to know exactly how much you’ll need to have in retirement based on your lifestyle, where you live and when you plan to retire. SmartAsset’s retirement calculator can help you figure that out so you can plan with goals in mind.
A financial advisor can help you set up a robust retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
One of the keys to saving for retirement is a strong asset allocation. It should change as you age, going from an aggressive equities-based portfolio aimed at building wealth to a more conservative portfolio focused on preserving wealth during retirement. Use SmartAsset’s asset allocation calculator to start building your portfolio.