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Broadly speaking, qualified retirement accounts offer some sort of tax benefit — either during the year that contributions are made or when distributions take place after retiring. But, not all retirement accounts are taxed the same.

With a traditional IRA, it’s possible for certain individuals to both invest for their future and reduce their present tax liability. For tax year 2022, the maximum IRA deduction is $6,000 for individuals younger than 50, and $7,000 for those 50 and older. For tax year 2023, the maximum IRA deduction is $6,500 for people younger than 50, and $7,500 for those 50 and older.

To maximize deductions in a given year, the first step is understanding how IRA tax deductions work. Practically speaking, a good place to start is the differences between common retirement accounts — and their taxation. Since each individual financial situation is different, speaking with a tax professional to share specific tax questions is a good idea.

Here’s a look at IRA tax deductions, including a deep dive into how both traditional and Roth IRA accounts are taxed in the U.S.

What Is a Tax Deduction?

First, here’s a quick refresher on tax deductions for income taxes — or, the tax owed/paid on a person’s paycheck, bonuses, tips, and any other wages made through work. “Taxable income” also includes interest earned on bank accounts and some types of investments.

Tax deductions are subtracted from a person’s total taxable income. After deductions, taxes are paid on the amount of taxable income that remains. Eligible deductions can allow qualifying individuals to reduce their overall tax liability to the Internal Revenue Service.

For example, Person X earns $70,000 per year. They qualify for a total of $10,000 in income tax deductions. When calculating their income tax liability, the allowable deductions would be subtracted from their income — leaving $60,000 in taxable income. Person X then would need to pay income taxes on the remaining $60,000 — not the $70,000 in income that they’d originally earned.

For the 2022 tax year, 22% is the highest federal income tax rate for a person earning $70,000. By deducting $10,000 from their taxable income, they are able to lower their federal total tax bill by $2,200, which is 22% of the $10,000 deduction. (There may be additional state income tax deductions.)

A tax deduction is not to be confused with a tax credit. Tax credits provide a dollar-for-dollar reduction on a person’s actual tax bill — not their taxable income. For example, a $3,000 tax credit would eliminate $3,000 in taxes owed.

Putting the IRA Tax Deduction to Use

Traditional IRA tax deductions are quite simple. If a qualifying individual contributes the maximum allowed to a traditional IRA in a year — $6,000 for the 2022 tax year and $6,500 for the 2023 tax year — they can deduct the full amount of their contribution from their taxable income.

That said, you are not eligible to claim your IRA deduction if you are:

•   Single and covered by a workplace retirement account and your adjusted gross income is more than $78,000 for tax year 2022 ($83,000 for tax year 2023)
•   Married filing jointly and covered by a work 401(k) plan and your AGI is more than $129,000 for tax year 2022 ($136,000 for tax year 2023)
•   Married, only your spouse is covered by a work 401(k) plan, and your AGI is more than $214,000 for tax year 2022 ($228,000 for tax year 2023).

It’s worth noting that you may claim a partial deduction, depending on your income if you are:

•   Single and covered by a workplace retirement account and your adjusted gross income is between $68,000 and $78,000 for tax year 2022 (between $73,000 and $83,000 for tax year 2023)
•   Married filing jointly and covered by a work 401(k) plan and your AGI is between $109,000 and $129,000 for tax year 2022 (between $116,000 and $136,000 for tax year 2023)
•   Married, only your spouse is covered by a work 401(k) plan, and your AGI is between $204,000 than $214,000 for tax year 2022 (between $218,000 and $228,000 for tax year 2023).

401(k), 403(b), and other non-Roth workplace retirement plans work in a similar way (contributions to Roth IRAs are not tax deductible). For the 2022 tax year, the contribution maximum for a 401(k) is $20,500 with an additional $6,500 catchup contribution for employees 50 and older. For tax year 2023, the contribution maximum is $22,500 with an additional $7,500 catchup contribution for employees 50 and older. A person who contributes the full amount in 2022 could then deduct $20,500 from their taxable income, potentially lowering their tax bracket.

One common source of confusion: The tax deduction for an IRA will reduce the amount a person owes in federal and state income taxes, but will not circumvent payroll taxes, which fund Social Security and Medicare. Also known as Federal Insurance Contributions Act (FICA) taxes, these are assessed on a person’s gross income. Both the employer and the employee pay FICA taxes at a rate of 7.65% each.

Understanding Tax-Deferred Accounts

Traditional IRA, 401(k), and other non-Roth retirement accounts are deemed “tax-deferred.” Money that enters into one of these accounts is deducted from an eligible person’s total income tax bill. In this way, qualifying individuals do not pay income taxes on that invested income.

But, Uncle Sam can’t be avoided forever. Because these taxes are simply deferred until later, money that leaves an account will usually be taxed at the point of withdrawal.

Let’s look at an example of this. Having reached retirement age, a person chooses to withdraw $30,000 per year from a traditional IRA plan. As far as the IRS is concerned, this withdrawal is taxable income. The traditional IRA money will be taxed as the income.

So, what’s the point of deferring taxes? Generally speaking, people may be in a higher marginal tax bracket earning as a working person than they are spending as a retired person. Therefore, the idea is to defer taxes until a time when an individual may pay proportionally less in taxes.

Tax Brackets and IRA Deductions

Income tax brackets can work in a stair-step fashion. Each bracket reveals what a person owes at that level of income. Still, when a person is “in” a certain tax bracket, they do not pay that tax rate on their entire income.

For instance, single filers pay a 12% federal income tax rate for the income earned between $10,275 and $41,775. Then, the tax rate “steps up,” and they pay a 22% tax on the income earned that falls in the range of $41,775 and $89,075. Even if a person is a high-earner and “in” the 37% tax bracket, they still pay the lower rates on their lower levels of income.

Why is this worth noting? Because tax deductions reduce a person’s taxable income at a person’s highest marginal rate (their highest “stair-step”). Using 2022 tax rates, the above-mentioned person with $70,000 in taxable income would be taxed like this:

•   10% up to $10,275 ($59,725 remaining)
•   12% up to $41,775 ($17,950 remaining)
•   22% on the remaining $17,950

However, if that same person contributes the maximum to their tax-deferred retirement account, they would be taxed 22% on the top amount minus what’s deductible. In other words, they wouldn’t be taxed 22% on the full $17,950.

401(k) Withdrawals and Taxation

Now, let’s compare that with the taxation on a $30,000 withdrawal from a 401k. Assuming 2022 income tax rates, a $12,000 withdrawal would be taxed at a 10% rate up to $10,275 and then a 12% rate for the remaining $18,000.

Taxes are assessed at a person’s “effective,” or average, tax rate. This is another reason that some folks prefer to defer their taxes until later, when they can pay a hypothetically lower effective tax rate on their withdrawals, rather than taxes at their highest marginal rate.

But, here’s why it’s not so simple: All of the above assumes that income tax rates remain the same over time. And, income tax rates (and eligible deductions) can change with federal legislation.

Still, plenty of earners opt to reduce their tax bill at their highest rate in the current year—and a tax deduction via an eligible retirement contribution can do just that.

For individual tax questions, it’s a good idea to consult a certified tax professional with questions about specific scenarios.

What About Roth IRAs and Taxes?

Simply put, there are no tax deductions for Roth retirement accounts. Both Roth IRA and Roth 401(k) account contributions are not tax-deductible.

The trade-off is that Roth money is not taxed when it is withdrawn in retirement, as is the case with tax-deferred accounts like a 401(k) and traditional IRA. In fact, this is the primary difference between Roth and non-Roth retirement accounts. With Roth accounts, taxes are already paid on money that is contributed, whereas income taxes on a non-Roth 401k are deferred until later.

So, then, what are some advantages of a Roth retirement account? All retirement accounts provide an additional type of tax benefit as compared to a non-retirement investment account: There are no taxes on interest or capital gains, which is money earned via the sale of an investment. Retirement accounts provide a “tax shelter” for investment growth.

Someone might choose a Roth over a tax-deferred retirement account because they prefer to pay the income taxes up front, instead of in retirement. For example, imagine a person who earned $30,000 this year. They pay a relatively low income tax rate, so they simply may prefer to pay the income taxes now. That way, the taxes are potentially less of a burden come retirement age.

Not everyone qualifies for a Roth IRA. There are limits to how much a person can earn. For a single filer, the ability to contribute to a Roth IRA for tax year 2022 begins to phase out when a person earns more than $129,000 ($138,00 for tax year 2023), and is completely phased out at an income level of $144,000 ($153,000 for tax year 2023). For a person that is married and filing jointly, the phase-out begins at $204,000 ($218,000 for tax year 2023), ending at $214,000 ($228,000).

Deduction and Contribution Limits

The maximum amount a person is able to deduct from their taxes by contributing to a retirement account may correspond to an account’s contribution limits.

Here’s how much money can be put into an IRA for the 2022 tax year:

•   Traditional IRA: $6,000 ($7,000 if age 50 or older), deductibility depends on whether the person is covered by a workplace retirement plan
•   401(k): $20,500 (additional $6,500 if age 50 or older)
•   403(b): $20,500 (additional $6,500 if age 50 or older)
•   457(b): $20,500 (additional $6,500 if age 50 or older)
•   Thrift Savings Plan (TSP): $20,500 (additional $6,500 if age 50 or older)
•   Simple IRA or 401(K): $14,000 (additional $3,000 if age 50 or older)
•   SEP IRA: The lower of 25% of an employee’s income, or $61,000
•   Solo 401(k): Either $20,500 or up to 100% of total earned income as employee, additional opportunity to contribute as the employer

Here are the maximum contributions for the 2023 tax year:

•   Traditional IRA: $6,500 ($7,500 if age 50 or older), deductibility depends on whether the person is covered by a workplace retirement plan
•   401(k): $22,500 (additional $7,500 if age 50 or older)
•   403(b): $22,500 (additional $7,500 if age 50 or older)
•   457(b): $22,500 (additional $7,500 if age 50 or older)
•   Thrift Savings Plan (TSP): $22,500 (additional $7,500 if age 50 or older)
•   Simple IRA or 401(K): $15,500 (additional $3,500 if age 50 or older)

The above lists are only meant as a guide and does not take into account all factors that could impact contribution or deduction limits—such as catch-up contributions. Anyone with questions about what accounts they qualify for should consult a certified tax professional.

Investing for Retirement

Different types of retirement accounts come with distinct tax benefits and, for eligible investors, IRA tax deductions. Opening a retirement account and contributing to certain tax-deferred accounts may affect how much a person owes in income taxes in a given year. Roth accounts can provide tax-free withdrawals later on.

After deciding which retirement account makes most sense (given a person’s unique tax situation), some folks opt to open an investment account. This can be done at an online brokerage platform like SoFi Invest®, where both opening an account and buying investments come with no fees.

One other option is to use a portfolio-building tool that takes into account an investor’s individual financial goals, preferred timeline, and risk tolerance. SoFi Invest’s easy-to-use app can help members to set up an IRA.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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SOIN20152

If your work days are in the rearview mirror now, you may be enjoying your retirement but also wondering how you might bring in a bit more cash. The average Social Security retirement benefit as of September 2022 is $1,628.17, which simply isn’t enough income to support a comfortable life for most people in the United States, especially older people who can often require more healthcare.

Fortunately, many retirees have options for bringing in extra income to make ends meet that might include working online, getting seasonal jobs, or starting a business. In addition, retirees can make use of resources to reexamine and potentially reallocate investments and savings. These moves can maximize their retirement experience.

For example, they might be able to shift invested money to a more liquid position. Or trade a big house that costs a lot to maintain for a smaller place that frees up extra cash for travel. Read on for some ideas for discovering extra income sources for retirees.

Online Jobs

For people who want to earn money from the comfort of home, there are many online jobs that require varying degrees of experience. Often you can work when you like, in your pajamas if you prefer. This is, after all, supposed to be your time. Here, some work-from-home jobs for retirees:

1. Virtual Assistant

Virtual assistants tackle jobs that companies don’t have the money or inclination to hire full-time employees for. This might include anything from handling social media to managing customer emails or handling the CEO’s schedule. Often, they work for small companies, but they may be called in to help large ones as well. Some virtual assistants make very good money; six figures even. The key is to create a niche, an area where you already have expertise to set you apart from the competition.

2. Bookkeeper

Bookkeeping can be a fairly easy skill to learn; it isn’t accounting, and bookkeepers don’t handle all the tasks of an accountant. A bookkeeper might create new accounts, handle payroll, and pay and issue invoices, usually with the help of bookkeeping software. They probably won’t be responsible for closing out the books, reporting taxes, or other tasks that have the legal liabilities of an accountant. One bookkeeper might be able to handle several clients.

3. Teacher

Even if you haven’t taught before, if you have knowledge to share and have always been good at explaining things to others, online teaching might be for you. You could teach English to non-English speakers, or tutor in any subject in which you have depth of knowledge. Earnings can range from a few dollars an hour to more than $25 depending on your expertise. An online search can lead you to many options.

4. Customer Service

You’d be surprised how many jobs there are for customer service representatives who want to work from home. You might be hired to help customers via phone, social media, or even chat. You could be working with products or services, from selling kitchenware to answering questions about healthcare services. Or if you have management experience, you might manage a team of home-based customer service representatives. This is a job that requires patience and a love of working with people.

Seasonal Jobs

5. Retail, Tax Season, Tourism

You may not want to work all year round. Perhaps just bringing in a little extra money now and again would suit you fine. If so, holidays, tourist season, and tax season may provide all the work you want. For example, U.S. retailers expect to hire many 100,000s of workers for the 2022 Christmas season, mostly working as sales associates in brick-and-mortar stores. For instance, Walmart alone is hiring 40,000 employees.

While Christmas retail may provide the most seasonal jobs, tax season isn’t too far behind and also provides hundreds of thousands of jobs for tax preparers. Many of them must first take a short course and work from the first of the year through April 16. But there are other opportunities, too. All summer and fall people need yard work and gardening help. If you live in a tourist town, attractions need staff, too. Picking up seasonal work means enjoying the leisure of retirement in between picking up extra cash.

Start Your Own Business

The skills you gained during your working years could provide the foundation for your own pursuit, or you could try something different. How many hours you devote to it is your call; flexibility can be a benefit of side hustles or entrepreneurial business. Some ideas:

6. Consulting

More and more companies are turning to contract work rather than hiring full-time employees. If you have a solid skill set, want to set your own hours, and choose your clients, you can use your connections to begin a consulting company. You may need a website or LinkedIn to promote your services, or you may have a strong enough network you can just reach out to connections and let them know you’re in business!

7. Service Work

Maybe you love cooking and can create a business providing meals for a handful of families every week. Perhaps you love kids and want to work as a nanny. Perhaps you are good at simple carpentry and can do odd jobs. Many families find they lack the time to take care of jobs, kids, homes, and hobbies and would love a reliable person to take on some of their tasks.

Downsize

Many people know how life gets more full and complicated as the years pass — buying stuff, accumulating debt, gaining complexity. Retirement can be the right time to figure out what brings you joy and start shedding that extra stuff which may have become a burden to manage.

8. Sell Stuff

By retirement age, many people have collected a lot of possessions. Instead of just unloading it for free, you might offer it on a site like Ebay or Etsy, or one of the dozens of other possible places to sell your things. Or, if you donate it, make sure to track what you gave away and keep receipts for a possible deduction. Then use a software or app to ensure you get the write-off at tax time.

9. Unload Debt

Debt is expensive. Whether it’s a credit card, a personal loan, or even a mortgage, it’s wise to find ways to reduce the cost of that debt. That might mean it’s time to refinance your mortgage and perhaps roll other debts into it to cut the interest rate and boost your tax deductions.

It might mean making extra payments on principal or using the extra income you bring in to whittle away at high-interest loans. It might mean seeing if you can get a better rate by using a personal loan for your car. Talk to a financial advisor to find the best ways to reduce the burden of debt.

10. Reduce Fixed Costs

Use a spending tracker or budget tracker to find ways to reduce your fixed monthly expenses like food, housing, transportation, and healthcare. Could you get by with only one car instead of two? Or maybe it’s time to sell that home and tuck into a smaller one that gives you more money at the end of the month.

Various tools let you check home values to see how much you could get for your current home. You could also eliminate a couple of streaming services or follow store sales to stock up on favorite items.

11. Ask for Discounts

Take advantage of seniors’ discounts everywhere you go. Many mobile phone services have senior discounts; grocery stores have senior discount days; movie theaters, hotels, airlines, all offer discounts to seniors.

Beyond age-related savings, know that you can also sometimes renegotiate bills for things like insurance and internet service. Many companies expect it and build it into their customer retention plans so you’re not asking for “special favors.” You might also try negotiating medical bills as well.

Revisit Your Financial Plan

Financial planning has to evolve as the markets evolve. You should ensure you have a retirement plan and that you regularly evaluate your financial portfolio. You may be able to move money around in a way that provides you extra cash each month.

The Takeaway

Many retirees are looking for ways to bring in more cash, and there are plenty of ways to do so, from starting a side hustle to selling unwanted items to taking on seasonal work. You might also benefit from taking a fresh look at your budget and reallocating some funds.

Another important facet of thriving during retirement can be to find the right banking partner. SoFi can be that ally. When you open a Checking and Savings online bank account with us, you’ll spend and save in one convenient place. Sign up with direct deposit, and you’ll earn a top-notch 4.00% APY and pay no fees, which can help your money grow faster.

Photo credit: iStock/fstop123

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