Unlike traditional individual retirement accounts (IRAs), a Roth IRA does not reduce your taxable income. Contributions to a Roth IRA are made with after-tax dollars, which means they do not have an immediate impact on your taxes or lower your adjusted gross income. However, they have many other benefits, and your Frame Wealth fee-only financial advisor can help you realize these potential tax benefits.
Adjusted Gross Income
Gross income is the sum of all taxable money you earn in a year before any deductions are taken. Contributors to your gross income include:
- Wages
- Capital gains
- Dividends
- Interest income
- Rental income
- Royalties
- Retirement deductions
- Alimony
Your adjusted gross income (AGI) is the line on your tax return that the Internal Revenue Service uses to determine your income taxes each year. To arrive at this number, you subtract any deductions or adjustments you qualify for from your total taxable income (gross income). Common adjustments you may be eligible for include:
- Employee business expenses
- Educator expenses
- Health Savings Account (HAS) deductions
- Early withdrawal penalties on savings accounts
- Traditional IRA contributions
- Self-employed Simplified Employee Pension (SEP) plans
- Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) plans
- Self-employed health insurance deductions
- Self-employment tax
- Student loan interest payments
Roth vs. Traditional IRAs: Tax Implications
Both traditional and Roth IRAs are good options to help save for your retirement.
Traditional IRAs
Contributions to a traditional IRA are made with pre-tax dollars, and taxes are deferred until you withdraw money from the account. Contributions to traditional IRAs can lower your adjustable gross income by as much as the contribution amount as long as the contribution is below the contribution limit ($7,000) and you are eligible for a traditional IRA. If you have access to a retirement plan through your workplace, your contributions are only deductible if your income falls below the income cap ($89,000 for single filers in 2025; $146,000 for married filers in 2025). Taxes are due when you withdraw money from your traditional IRA.
Roth IRAs
Contributions to a Roth IRA are made with post-tax dollars. You cannot deduct them and reduce your AGI. However, contributions to your Roth IRA grow tax-free, and since you have already paid taxes on the income, there are no taxes due when you take a qualified withdrawal. Maximum contributions to a Roth IRA are the same as a traditional IRA ($7,000). Both types of IRAs allow people age 50 or older to contribute an additional $1,000 as a catch-up contribution.
Unlike a traditional IRA, in which participating in a workplace retirement account and your income level impact your eligibility, only your modified adjusted gross income (MAGI) is used to determine your Roth IRA eligibility. In 2025, single taxpayers can contribute to a Roth IRA if their MAGI is below $150,000, and joint filers can contribute if their MAGI is below $240,000.
Tax Benefits of a Roth IRA
While it is true that a Roth IRA does not lower your AGI and make you eligible for tax benefits when you make your contributions, there are some tax benefits from Roth IRAs that you can expect, including:
- The contributions and earnings in your Roth IRA will grow tax-free
- Qualified withdrawals from your Roth IRA are tax-free
- You are not required to take required minimum distributions, so you have more control over your retirement income
Traditional vs. Roth IRAs
If you are eligible, you may want to contribute to both traditional and Roth IRAs. In general, people contribute to a traditional IRA if their current income is higher than they project their income will be when they plan to withdraw their money. This allows them to take advantage of the tax deductions when they have a higher annual income.
People who are early in their careers and have a lower income than they project they will when they withdraw their money will frequently opt for a Roth IRA. They pay taxes on their Roth IRA contribution using their current lower tax bracket and withdraw money from their Roth IRA later in life when they expect to have a higher income. They save tax money because they can withdraw the contribution money tax-free at any time.
If your tax bracket is the same throughout your lifetime and you make the same contributions to a traditional and Roth IRA, with the Roth IRA taxpayer paying taxes now and the traditional IRA taxpayer paying taxes at withdrawal, the end value of both accounts is the same. The difference lies in whether you expect your tax bracket to change over your lifetime and whether you can make a larger contribution to a traditional IRA now because you do not have to pay taxes on it.
The key to saving tax money and increasing the value of your retirement accounts is lowering your tax burden. You can do this by managing your income and deductions to qualify for the lowest possible tax bracket.
At Frame Wealth Management, our financial advisors in New York can help you evaluate all your options now and project what your retirement income and potential deductions might look like. We also provide expert guidance on short-term strategies to reduce AGI, such as tax-loss harvesting, health savings accounts, and charitable deductions.
Give us a call today at 866-395-1786 or contact us online to schedule a meeting and discuss your unique financial needs. Let us be your trusted partner on the path to financial success.
