How to Contribute to an IRA Pre-Tax: Rules and Steps Explained

Saving for retirement through an Individual Retirement Account (IRA) provides tax benefits, particularly with pre-tax contributions. These contributions lower taxable income in the year they are made, reducing the overall tax bill while allowing investments to grow tax-deferred until withdrawal. Understanding how to contribute on a pre-tax basis ensures these advantages are maximized without penalties or limitations.

Eligibility Criteria

Before making pre-tax contributions to a traditional IRA, individuals must meet requirements related to income, tax filing status, and participation in other retirement plans. The IRS sets these guidelines to determine who qualifies for tax-deferred savings.

Earned income is the primary requirement. Only compensation from employment—such as wages, salaries, commissions, and self-employment earnings—qualifies. Passive income like rental income, dividends, or Social Security benefits does not count. However, a spousal IRA allows contributions for a non-working spouse if the other spouse has sufficient earnings.

Previously, individuals over 70½ could not contribute to a traditional IRA, but the SECURE Act of 2019 removed this restriction. Now, anyone with eligible compensation can contribute, regardless of age.

Income limits do not prevent traditional IRA contributions, but they affect deductibility. If either the individual or their spouse participates in a workplace retirement plan, the ability to deduct contributions depends on modified adjusted gross income (MAGI). The IRS updates these thresholds annually, so checking the latest figures is necessary.

Setting Up Pre-Tax IRA Contributions

Opening and funding a traditional IRA with pre-tax dollars requires selecting the right account and ensuring contributions are properly designated for tax-deferred treatment. Most financial institutions, including banks, brokerage firms, and robo-advisors, offer IRAs, but investment options, fees, and account management features vary.

Contributions can be made through direct transfers from a bank account, payroll deductions (if the employer supports them), or rollovers from another eligible retirement plan. Ensuring contributions are classified correctly at the time of deposit is necessary to maintain tax advantages. Some providers allow both pre-tax and after-tax contributions within the same IRA, so tracking deductible funds is essential to avoid complications when filing taxes.

The IRS allows contributions for a given year up until the tax filing deadline, typically April 15 of the following year. This flexibility enables individuals to make last-minute contributions to reduce taxable income. Spreading deposits throughout the year using a systematic investment plan can also help mitigate market volatility.

Deductibility Thresholds

The ability to deduct traditional IRA contributions depends on income levels and tax filing status. The IRS sets specific MAGI limits that determine full, partial, or no deductibility, updating these thresholds annually.

For 2024, single filers covered by a workplace retirement plan can take a full deduction if their MAGI is $77,000 or less, with deductions phasing out completely at $87,000. For married couples filing jointly where the contributing spouse is covered by an employer plan, the phase-out range is $123,000 to $143,000. If only one spouse participates in a workplace plan, full deductions are allowed below $230,000, with phase-outs ending at $240,000.

Those exceeding these thresholds can still contribute to a traditional IRA, but the contributions become non-deductible. In such cases, individuals must track after-tax contributions using Form 8606 to prevent double taxation when withdrawing funds in retirement.

For those near phase-out ranges, adjusting contributions strategically can help. Options include shifting some savings to a Roth IRA if eligible, contributing partially to a deductible IRA while placing excess funds into a non-deductible IRA, or using a backdoor Roth IRA strategy. The backdoor Roth involves making non-deductible contributions and later converting them to a Roth IRA, allowing for tax-free growth and withdrawals. This strategy requires careful tax planning to avoid unintended tax liabilities, particularly if other pre-tax IRA funds exist that could affect the pro-rata rule during conversion.

Coordination With Employer-Sponsored Plans

Balancing contributions between a traditional IRA and an employer-sponsored retirement plan requires considering tax implications, investment options, and overall portfolio diversification.

Employer plans such as 401(k)s or 403(b)s often provide benefits like company matching contributions, which effectively increase retirement savings. Prioritizing contributions to capture the full employer match before funding an IRA ensures no available benefits are left on the table.

Investment choices also differ significantly between employer plans and IRAs. Workplace plans typically offer a limited selection of mutual funds chosen by the plan administrator, often with higher expense ratios. In contrast, IRAs allow access to a broader range of assets, including individual stocks, bonds, ETFs, and alternative investments. This flexibility can be used to complement workplace accounts by diversifying holdings across different asset classes or rebalancing overall risk exposure.

Required minimum distributions (RMDs) apply to both traditional IRAs and most employer plans starting at age 73 under the SECURE 2.0 Act. However, some employer-sponsored plans permit RMD deferral if the individual remains employed beyond this age and does not own more than 5% of the company. Understanding these differences can help optimize tax efficiency in retirement.

Contribution Limits

The IRS sets annual contribution limits for traditional and Roth IRAs combined, meaning individuals cannot exceed the cap even if contributing to both types of accounts.

For 2024, the standard contribution limit is $7,000 for individuals under 50, while those 50 and older can make an additional $1,000 catch-up contribution, bringing their total to $8,000. These limits are periodically adjusted for inflation.

Exceeding these limits results in a 6% excess contribution penalty for each year the overage remains in the account. To avoid this, individuals who mistakenly contribute too much can withdraw the excess amount, along with any earnings, before the tax filing deadline, including extensions. If the excess is not corrected in time, it must be reported on IRS Form 5329, and any earnings on the over-contributed amount may also be subject to income tax.

Those who regularly max out contributions should also consider how these limits interact with other retirement savings strategies, such as employer-sponsored plans, to ensure they are optimizing tax-advantaged accounts efficiently.

Tax Withholding Considerations

While traditional IRA contributions reduce taxable income, tax implications arise when funds are withdrawn. Distributions are taxed as ordinary income, and if taken before age 59½, they may also incur a 10% early withdrawal penalty unless an exception applies. Because taxes are not withheld at the time of contribution, individuals must plan for future tax liabilities, particularly if they anticipate being in a higher tax bracket during retirement.

One way to manage tax exposure is through strategic withdrawal planning. RMDs begin at age 73, and failing to take the required amount results in a penalty—50% of the shortfall before 2023, reduced to 25% under SECURE 2.0, and potentially 10% if corrected in a timely manner. To mitigate large tax bills, retirees may benefit from spreading withdrawals over multiple years, converting portions of their IRA to a Roth IRA in lower-income years, or using qualified charitable distributions (QCDs). QCDs allow individuals to donate up to $100,000 annually directly to charity, satisfying RMD requirements while avoiding taxable income.