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Opening an IRA Before the Tax Deadline Could Save You Money

Learn how contributing to your Traditional IRA can give you a last-minute deduction before the tax filing deadline.

Posted on April 4, 2024

tax deduction

As we approach Tax Day, taxpayers still have the chance to save on their 2023 income taxes by making a last-minute IRA contribution before the tax filing deadline. That's right - saving for retirement is not the only reason to open and contribute to a self-directed individual retirement account (SDIRA). This simple strategy could help you lower your taxes.

How Can an SDIRA Save You Money?

Did you know making contributions to a Traditional IRA can help lower your taxes by reducing your taxable income? If you meet certain requirements, which we will cover below, you may be allowed to deduct the contribution from your income. For tax year 2023, the maximum contribution is $6,500 for a Traditional and Roth IRA with an additional $1,000 catch-up contribution if you're age 50 or older. (See current contribution limits.) Remember, you must have earned income to contribute to an IRA. The Internal Revenue Service (IRS) considers earned income as any taxable compensation received from working a salaried or hourly job and self-employment revenue.

This means if you married filing jointly and do not have a retirement plan at work, you are able to claim a full deduction on your tax return for the contributions you make to your Traditional IRA. If you or your spouse have a retirement plan at work, then your ability to deduct contributions will depend on your income and where it falls within the Traditional IRA income limits. You can contribute to an IRA even if you have an employer retirement plan, though you may not be able to deduct the full amount of your contribution.

Understanding Deductibility

Your Traditional IRA contributions may be tax-deductible, but the amount of deduction is dependent on your modified adjusted gross income (MAGI) and if you or your spouse is covered by an employer-sponsored retirement plan. You're eligible to claim a full tax deduction for your contributions to a Traditional IRA if your income is lower than the applicable phase-out range, and a partial deduction if your income falls within the phase-out range.

Traditional IRA Phase-Out Ranges for Tax Deduction

Tax Filing Status 2023 Tax Year 2024 Tax Year
Single or Head of Household $73,000 - $83,000 $77,000 - $87,000
Married Filing Jointly $116,000 - $136,000 $123,000 - $143,000
Married Filing Separately $0 - $10,000 $0 - $10,000
Spousal IRA Contributions $218,000 - $228,000 $230,000 - $240,000

Other SDIRA Contributions

Another option for those that are married are spousal contributions. A spousal IRA allows a working spouse to contribute to an SDIRA on behalf of a non-working spouse who has little to no income, as long as the contributor has earned income. The rules work the same as a normal account, except that the contributor is able to make a contribution in the name of the non-working spouse.

You may also be eligible to receive a further tax benefit for contributions that you make to your SDIRA called the Saver's Credit. The Saver's Credit was created to provide a direct financial incentive for lower income workers to save for retirement. Saver's Credit can reduce an individual's tax bill by up to $1,000 if their income is below certain thresholds or up to $2,000 for taxpayers filing joint tax returns.

What is the Contribution Deadline for an IRA?

For 2023 contributions, you have up until April 15, 2024. If mailing in a contribution via check, as long as the postmark date is on or before April 15th, even if it arrives to your custodian after that date, it can still be applied. Always be sure to include the contribution year on your check when sending checks to your custodian, so the funds are applied to the proper year. If no year is specified, the funds will be applied to 2024 by default. If you've already filed your taxes for 2023 but haven't made a contribution, don't worry. With a little extra work, you can file an amended return, contribute to an SDIRA, and still receive those tax savings.

If you have more questions about how to build your retirement nest egg and reduce your taxes, our team is happy to help. You can talk to an IRA Specialist at 855-FUN-IRAS (855-386-4727) or schedule a free consultation.

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