Saving for your future

Using IRAs and tax deductions to maximize tax savings.

From digging through old receipts to waiting in seemingly endless post office lines, the annual rituals of tax season can be frustrating. In addition to those inconveniences that make April 15th a stressful day for many, the reality is that no one enjoys handing over their hard-earned money to the IRS.

Finding tax deductions and tax write-offs can ease the stress of tax season and boost the balance in your bank account. If you’re looking for a way to lower your tax bill, putting money into a retirement account might be a smart idea.

Saving for your future is something you’re probably already planning to do. And if you can save money on your taxes while saving for your future, you can feel good about your financial decisions on 2 fronts at once.

Understanding IRAs

An IRA is a retirement account you set up for yourself, which is different from a 401(k) that is provided by an employer. Even if you’re already saving for retirement regularly, you may want to make an extra contribution to your Individual Retirement Account (IRA) before tax day.1

There are 2 basic types of IRAs you’ll want to know about:

  • Traditional IRAs have been around since Congress put them in place in the 1970s. When you put money in this type of IRA, it may be tax deductible, depending on your income level. If you are looking to save money on your tax bill now, you might want to consider putting money in a traditional IRA.
  • Roth IRAs were introduced in the 1990s. They allow you to save money that has already been taxed so that down the road, when you take it out, you won’t have to pay taxes on it.

IRAs and your taxes

When you deposit money into a traditional IRA, that amount can be written off from your yearly total income. This means that if you make $50,000 in a year and deposit $4,000 into your IRA, the IRS will consider your yearly income to be $46,000 when you do your taxes.

That $4,000 is not magically tax-free. You’ll still have to pay taxes on it when you retire and withdraw from your IRA. Depending on your tax rate, when you put money away for retirement, you might get a better tax return too. This can help reduce your current tax bill and give you an incentive to invest a little extra money in your future.

For the most part, tax deductions only count toward the year you are filing. After January 1st, it can be hard to find ways to lower your taxable income for the previous year. But contributing to a traditional IRA is a great last-minute tax savings option because you can make those contributions all the way up until tax day.2 You’ll just need to make sure that you indicate which year to apply the deduction to when you make your contribution.

Income, age and IRAs

When it comes to making decisions about taxes, one size doesn’t fit all. Your financial situation is unique, and so are the choices you make when you’re filing taxes.

IRA tax deductions vary based on a few factors.3 That includes mainly employment, income level and age. If you have a retirement plan at work, there may be a limit on how much of your IRA contribution can count toward tax deductions. If you don’t have a retirement plan at work, you can deduct the full amount of what you contribute each year. Additional restrictions come into play with your income level and your age, so take time to understand your tax bracket and take advantage of all possible deductions.

For married couples, take into account whether or not you and/or your spouse are covered by a retirement plan at work. Income levels and many other factors will contribute to your final deduction limits. Ultimately, you may choose to file jointly or separately. A tax professional can help you make this decision.

For single individuals, it’s all about your income level. If you make less than $129,000 per year, typically you can contribute the maximum amount to your IRA ($6,000 if you’re under 50 or $7,000 if you're over 50). But if you make over $129,000 per year, you can’t contribute the maximum amount.4,5 As with any tax decision, it’s best to consult a tax professional for advice on your individual tax needs.

Maximizing your savings now and later

Remember, tax season isn’t all bad. After decisions are made and the paperwork is completed, you might have a tax return to look forward to. And if you do get money back, it's yours to play with!

Whether you’re looking for ways to save on your taxes right now or looking ahead to next year, an IRA contribution could be a smart tax deduction. Saving for your future will make you feel more confident financially, and saving on your taxes at the same time might just make this April one of your best tax seasons yet.

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