As the clock ticks towards the April 15 tax deadline, investors are faced with a crucial decision: should they make a last-minute IRA contribution? This annual event often sparks a surge in deposits, and this year is no exception, as highlighted by Fidelity Investments' recent data.
The IRA Contribution Rush
During the two weeks leading up to March 20, IRA contributions saw an impressive 18% increase compared to the previous five weeks. Interestingly, nearly three-quarters of these deposits went into after-tax Roth IRAs, rather than traditional pre-tax IRAs. This trend raises an intriguing question: why are investors favoring Roth IRAs over their traditional counterparts?
Understanding the Numbers
Rita Assaf, Vice President of Retirement Offerings at Fidelity Investments, emphasizes the importance of "knowing your numbers" when it comes to IRA contributions. For 2025, the IRA contribution limit stands at $7,000, with an additional $1,000 for investors aged 50 and above, provided they have sufficient income from work.
Roth IRAs vs. Traditional IRAs
The key difference between Roth and traditional IRAs lies in their tax treatment. Roth IRAs offer tax-free growth and withdrawals in retirement, but there is no upfront tax break for contributions. On the other hand, traditional IRA contributions provide a deduction, but the money grows tax-deferred, and future withdrawals are subject to regular income taxes.
Who Qualifies for Roth IRA Contributions?
Eligibility for Roth IRA contributions is income-based, and many investors may overestimate their deposit limits. The struggle, according to Assaf, lies in understanding modified adjusted gross income (MAGI), which can be a confusing concept. MAGI is a critical factor in determining eligibility, and its calculation varies depending on the tax break in question, as per the IRS guidelines.
For Roth IRA contributions, MAGI starts with your adjusted gross income (line 11a on your 2025 tax return) and then includes certain tax breaks, such as deductions for IRA contributions, student loan interest, and more. It also subtracts income from Roth conversions and retirement plan rollovers.
In 2025, you can contribute up to $7,000 (or $8,000 if you're 50 or older) to a Roth IRA if your MAGI is below $150,000 for single filers or under $236,000 for married couples filing jointly. The contribution limit gradually decreases as MAGI rises, with a complete phase-out at $165,000 for single filers and $246,000 for married couples filing together.
Traditional IRA Deduction Eligibility
Anyone with earned income can make traditional pre-tax IRA contributions, but the deduction depends on your MAGI and participation in workplace retirement plans. If you or your spouse contribute to a company plan, such as a 401(k), the traditional IRA deduction phases out based on your filing status and MAGI.
However, it's essential to consider more than just the current-year IRA contribution deduction. Experts advise weighing your investing goals, current and future income tax brackets, and potential tax diversification across accounts.
A Word of Caution
Certified Financial Planner Joon Um, Managing Owner of Secure Tax and Accounting in Hayward, California, urges investors not to rush into contributions solely because of the deadline. "Make sure it actually fits your situation," he advises.
As we navigate the complexities of IRA contributions, it's crucial to understand the underlying numbers and consider the broader implications for our financial future. The decision to contribute to an IRA, whether Roth or traditional, should be a well-informed one, taking into account our unique financial circumstances and long-term goals.
