Retirement Account Tax Savings

The government really wants you to plan for retirement. So much so that they offer tax savings on money you contribute to a retirement account. If you meet the requirements, these tax savings can be a nice incentive for investing in your retirement account.

There are two types of tax savings currently offered for Traditional retirement accounts. One of these savings is also offered with Roth retirement accounts. Let’s start with tax deductions.

Tax Deduction for Traditional IRAs

Depending on your tax situation and annual adjusted gross income, which helps determine how much of your income is actually taxed each year, which for 2025 is up to $7,000.00 if you’re younger than 50 years old, and up to $8,000 if you’re older than 50. To see a breakdown of the rules to qualify for a deduction check the official IRS website. You might be thinking, “how does a tax deduction work?”. Here’s a simple example.

Let’s say your adjusted gross income this year is $60,000. If we assumed the standard deduction of $15,000 (which is a flat amount the IRS lets you deduct to lower your taxes) your taxable income would be:

 $60,000 - $15,000 = $45,000 (taxable income)

Using the 2025 federal tax rate for a single person with no dependents (this is just a simple hypothetical example, your actual tax situation may be different), the federal taxes you would owe on $45,000 would be calculated as $5,161.

Now let’s assume you contributed $5,000 this year to your Traditional IRA retirement account. If you qualified to deduct the full contribution your adjusted gross income would be reduced by the $5,000 you contributed to your retirement account:

$60,000 (original adjusted gross income) - $5,000 (contributed to your retirement account) = $55,000 (new adjusted gross income)

We again assume the standard deduction of $15,000, but this time we subtract it from your new adjusted gross income of $55,000, so your taxable income is calculated as:

$55,000 - $15,000 = $40,000 (taxable income)

As a result of the reduction in taxable income, the total federal tax due would now be calculated as $4,561. Now we can calculate the amount of tax savings you received from investing in your retirement account:

$5,161 (original taxes owed) - $4,561 (new taxes owed after retirement contribution) = $600 (tax savings)

In summary you saved $600 just for investing in your own retirement account. Not to mention, depending on the state you’re in you may also be able to deduct your IRA contributions from your state income tax.

Saver’s Credit (Applies to both Traditional and Roth IRAs)

While the tax deduction savings is great, the IRS Saver’s Credit can offer even more savings. Instead of receiving a deduction on how much of your income is taxed, the Saver’s Credit offers you a direct credit on the taxes you owe for contributing to a retirement account. To qualify for a credit your adjusted gross income has to be below:

• $39,500 per year if you’re filing taxes as an individual

• $79,000 if you’re married and filing jointly

• $59,250 if you’re filing as the head of household

To see the full breakdown of the rules to qualify for the Saver’s Credit go to the official IRS website. You might be thinking, “what’s the difference between a deduction and a credit?” 

Earlier, we showed you how a deduction reduces your adjusted gross income, which ultimately results in a tax savings. However, a credit is applied directly to your tax bill instead of your adjusted gross income. Let’s take a look at a simple example to help explain this.

Let’s say a married couple filing jointly had a gross income of $50,000 and assume they contributed $4,000 to their Traditional IRA. As we showed earlier, the amount contributed to a retirement account is reduced from the couple’s income, so their adjusted gross income becomes:

$50,000 (gross income) - $4,000 (retirement plan contribution) = $46,000 (adjusted gross income)

Based on the Saver’s Credit guidelines, a married couple with an adjusted gross income of $46,000 is eligible for a credit on 50% of their retirement contribution. We calculate the credit as:

50% of $4,000 (retirement plan contribution) = $2,000 (Saver’s Credit)

As you can see, it's a fairly simple calculation. The couple receives a tax credit of $2,000 to reduce their overall tax bill for investing in their retirement account.

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