As we inch closer to the tax filing deadline, we’re all looking to reduce our tax bill so that we can receive back the largest possible tax refund (or reduce the size of the check we have to send to the IRS). We can decrease the annual tax burden by utilizing the greatest number of deductions that are available.
If the deduction for IRA contributions is available to you, it can prove to be an extremely valuable benefit. Here’s how your self-directed IRA can boost your tax refund:
Deductibility for Traditional IRAs. Depending on your modified adjusted gross income (MAGI), and whether you are covered by a retirement plan at work (such as a 401(k)), the contributions you make to a traditional IRA may be tax deductible.
- Individuals who are not covered by a workplace retirement plan are eligible for full tax deductibility of their contributions, regardless of their MAGI.
- For single individuals who are covered by a plan at work for 2021, IRA contributions are fully deductible for a MAGI of up to $66,000 (with a gradual deductibility phase out between $66,000 and $76,000).
- For married couples filing jointly, where the contributing spouse is covered by a workplace plan, full deductibility is available for a MAGI of $105,000 (with a deductibility phase out between $105,000 and $125,000).
Note that these figures only relate to the deductibility of contributions, not eligibility for contributions. In general, any individual with earned income can contribute to a traditional IRA in an amount not exceeding that earned income. In contrast, being able to make contributions to a Roth IRA (which are not deductible) will depend on your MAGI.
Tax Benefits for Roth IRAs.
Despite the fact that you can’t take a tax deduction for contributions you make to your self-directed Roth IRA, there are still some reasons for you to consider that type of account. Withdrawals from a Roth IRA are made on a completely tax-free basis, instead of having to pay taxes on withdrawals as you would with a traditional IRA.
Furthermore, Roth IRAs are not subject to the rules on required minimum distributions. If you have a traditional self-directed IRA then you are required to make specified withdrawals every year once you reach age 72. If you don’t need to take withdrawals from your self-directed IRA in order to pay your living expenses, the benefits of being able to let the balance of your Roth IRA continue to grow tax-free can be significant.
To learn more about self-directed Roth IRAs, contact an experienced custodian such as Quest Trust Company.