IRA Tax Deduction, It’s Not Too Late
The deadline for filing your taxes is fast approaching. One tactic you might not have thought of can help you save for retirement and provide you with a deduction. Assuming you have earned income and fall within certain limits you can contribute to a Traditional IRA and take a deduction off your taxable income. This is as long as your contribution is credited before 11:59pm on April 17th. So hurry!
If you have a retirement plan at work, such as a 401(k), you might be eligible to make a tax-deductible Traditional IRA contribution, depending on your modified adjusted gross income (MAGI).
Here’s the breakout from the IRS:
But What if I Don’t Have a Plan at Work?
If you don’t have a Retirement plan at work like a 401(k), then all of your Traditional IRA contributions are tax-deductible regardless of income, but this isn’t true for Roth IRA’s.
How Much Can I Contribute?
If you’re under 50, you can contribute up to $5,000 and if you’re over 50 you can contribute up to $6,000. But keep in mind that you can’t contribute these amounts if you didn’t earn them and contributions can be made up to the lesser of the dollar amounts or 100% of earned income.
Contributing to an IRA sounds great but aren’t there different types? Do they all qualify?
Traditional IRA Profile
- Tax deductible contributions (depending on income levels we discussed above)
- Withdraws begin at age 59 1/2 and are mandatory by 70 1/2.
- Be careful and make sure you don’t need access to your contribution before retirement, otherwise all funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (subject to exception).
- Taxes are paid on earnings when withdrawn from the IRA
- Contributed funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
- Available to everyone; no income restrictions to contribute but again only people with the incomes in the table above can receive a deduction.
Roth IRA Profile
- Contributions are not tax deductible
- No mandatory distribution age
- All earnings and principal are 100% tax free if rules and regulations are followed
- Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
- Available only to single-filers making up to $107,000 or married couples making a combined maximum of $169,000 annually.
- Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).
Comparing Traditional and Roth IRAs
April 17th is fast approaching. Have you gotten your taxes done yet? What questions do you have about contributing to an an IRA for a tax deduction that we can answer?