Watford, with only one win to their credit in the league, look set to face a long, hard winter.
Ray Lewington's men took the lead after 48 minutes, but as the manager said: "We panicked, sat deep and really there was only going to be one result."
Watford disputed the winning goal, claiming that Pablo Counago was offside when Magilton chipped the ball from the edge of the box over keeper Alec Chamberlain.
"We've had a look at the video but it is not decisive. I can't really see that he was offside but really the goal was inevitable," admitted Lewington.
Ipswich boss Joe Royle brought on Counago and new on-loan signing from Sheffield Wednesday Shefki Kuqi.
"It's nice when subs pay off. We were very turgid in the first half and I told them if we do nothing else, we will pass the ball," he said.
"I really thought we deserved to win in the end."
Watford took the lead three minutes into the second half when a mis-hit shot by Lee Cook fell to Scott Fitzgerald who toe-poked the ball into the net.
Watford just about deserved the lead having created more goalmouth incidents in the first half.
But three minutes later, Magilton split the defence with neither Paul Robinson nor Chamberlain cutting out the pass which set up Kuqi for an angled shot from close range.
Ipwwich grew stronger and finally broke through after 82 minutes.
While Watford were appealing for offside, Magilton chipped the ball over Chamberlain from the edge of the box.
Watford went through the motions of trying to retrieve a point.
"We didn't throw the kitchen sink at them because we just don't have any big players to contest the ball if we bombard their penalty area with crosses," said Lewington.
Watford: Chamberlain, Kelly, Cox, Dyche, Robinson, Devlin, Ardley, Mahon, Cook, Webber, Fitzgerald. Subs: Dyer, Gayle, Hand, Young, Pidgeley.
Ipswich: Davis, Wilnis, Naylor, Santos, Richards, Wright,Bart-Williams, Magilton, Westlake, Bent, Armstrong. Subs: Counago, Bloomfield, Nash, Kuqi, Price.
Referee: A Leake (Lancashire)