As we inch closer to the April 15, 2014 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:
Deductible Contributions to Traditional IRAs.
For traditional self-directed IRAs, the contribution limit for the 2013 tax year is $5,500 (or $6,500 if you’re age 50 or older). The deductibility of your annual contributions will depend on several factors: your tax filing status; your modified adjusted gross income; and whether or not you’re covered by an employer-sponsored retirement plan such as a 401(k).
If you file a single return, then you’ll be able to deduct the full amount of your annual contribution if you’re not covered by an employer retirement plan. If you are covered by an employer plan, then you can still deduct the full value of your IRA contribution if your income is $59,000 or less. If your income is between $59,000 and $69,000 then you’ll be able to take a partial deduction.
If you’re married and file a joint return, and you’re not covered by an employer-sponsored retirement plan but your spouse is, then you’ll be able to deduct the value of your contribution if your joint income is $178,000 or less. (There is a partial deduction available for joint incomes between $178,000 and $188,000). If you are covered by an employer sponsored plan then the full deduction is available for an income of $95,000 (with a partial deduction available for an income between $95,000 and $115,000). If neither you nor your spouse is covered by a plan at work then the full deduction is available regardless of income level.
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 70½. 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.