To Reduce Your Taxes, Open An IRA Before The Deadline

Even though 2023 is long gone, making a standard IRA contribution is still a great way for people to reduce their 2023 income taxes. It’s a simple step, and one of the few things you can still do to lower your taxes from the previous year. The contribution deadline is April 15, 2024, the day taxes are payable.

But not everyone can benefit from this tactic, and the amount you can deduct is strictly capped. Nevertheless, funding an IRA can allow you to save a respectable amount of money.

How Much You Could Save With an IRA

You can make an IRA contribution of up to $6,500 for the tax year 2023. You can donate an extra $1,000 if you’re fifty years of age or older, for a total of $7,000. You won’t pay taxes on the money you deposit into the account if you meet the standards, which are detailed below, and you can deduct the entire amount from your income.

Your taxable income would be lowered by the same amount, for example, if you were in the 24 percent federal tax rate and made the maximum $6,500 in contributions. By doing this, you would save $1,560 in total federal tax burden ($6,500 x 24 percent). Additionally, you might save more money on state taxes. You could say that the government is paying you to save money.

Even if your employer offers a retirement plan, you can still make contributions to an IRA; but, depending on your income, you might not be able to deduct the entire amount of your contribution:

• You will be eligible to keep the entire tax savings if neither you nor your spouse have any employer-sponsored retirement plans. For individuals who are not covered by a workplace plan, the IRS offers more information.
• Your spouse’s or your own IRA contribution becomes less deductible beyond a particular income threshold, if you or they do have a plan at work. For instance, you can deduct the entire amount as a single filer if your modified adjusted gross income for 2023 is less than $73,000. Married couples filing jointly are still eligible for full deductibility even with a modified gross income of up to $116,000. (In 2024, the thresholds are higher.)

However, it gets even better for taxpayers with low incomes. This is due to an extra benefit known as the Saver’s Credit. This could result in an additional $2,000 in tax savings for you. If you fulfill the income conditions, you can receive both the bonus and the initial tax savings.

What Is The Contribution Deadline?

Anytime during the year and up until the tax day of the subsequent year, you are able to make contributions to an IRA. For instance, taxpayers have until April 15, 2024, the tax deadline, to make contributions to an IRA for the 2023 tax year, but they can make them at any point in 2023. This implies that you have to have funded the account in addition to opening it by this date.

However, because of the extended contribution window, you can begin contributing for 2024 as soon as you’ve paid for your 2023 contributions, as opposed to rushing to pay at the end of the tax year in 2025.

Moreover, what happens if you file your taxes before making your donation? Not a huge concern. You can refile your tax return and still receive the tax benefit as long as you make your IRA contribution before the tax deadline. Although there is some more work involved, the savings make it well worth the trouble.

Are You Qualified To Open an IRA?

If you have earned income for a certain tax year, you qualify for an IRA. However, if your spouse earned taxable income while you did not, you might also qualify for a spousal IRA.

As previously stated, the maximum contribution for 2023 is $6,500, or $7,500 for individuals over 50. The contribution cap rises to $7,000 for 2024, or $8,000 for individuals over 50. You may only contribute up to your taxable income, though, if your income is below these caps.

Even though an IRA can reduce your taxes, depending on your income, the IRS may place restrictions on the tax deduction. You can still make contributions to an IRA even if your income is higher than these thresholds, but you won’t receive the tax benefit. If so, you can be eligible for one of the most tax-advantaged retirement plans by using a backdoor Roth IRA.

Tax Savings Comparison: Traditional vs. Roth IRAs

Make sure you choose the correct IRA—the traditional IRA—if you’re hoping to save money on taxes at the last minute this year. However, you should be cautious because there is another type that offers tax benefits down the road rather than now: the Roth IRA.

By letting your investments grow tax-free until retirement, the traditional IRA gives you a tax break today. You will be responsible for paying taxes on the distributions when you take money out in the future.

On the other hand, since you’re saving with after-tax money now, the Roth IRA offers you a tax credit in the future. Your Roth IRA investments grow tax-free, and any future eligible withdrawals are free of taxes.

Even though these are the biggest distinctions between the two IRAs, there are still more distinctions that you should be aware of before making your ultimate decision.

In Summary

The potential of an IRA to protect your investments from taxes is what really makes it valuable, even while a tax benefit for this year is a terrific reason to contribute to one. In this manner, you’ll roll up a larger portfolio faster and allow your assets to multiply more quickly. You may calculate the potential growth of your investments over time with the help of Bankrate’s IRA calculator.

However, in order to receive that level of growth, you must act by opening and funding an IRA by April 15 of this year, which is the deadline. Due to the possibility of better returns on investment, brokerages are among the greatest places to put your money.