There's Still Time to Make This Smart Move to Lower Your Taxes AND Boost Your Retirement
Tax season is upon us, which means many Americans are seeing some extra money in the bank.
If you haven't filed yet, you could get even more cash back from Uncle Sam (or a reduced tax bill, if you owe) if you make a contribution to a traditional IRA by the April 15th deadline to file your 2018 taxes. That's right: you can still retroactively contribute to your IRA for tax year 2018 and reduce your taxable income by a pretty sizable amount.
“It’s one of the only things you can do up until the 2018 tax deadline that can lower the amount of taxes you owe,” Lisa Greene-Lewis, CPA and TurboTax expert, tells Money.
Plenty of people wait until the last minute: During tax season last year, 33% of Fidelity IRA contributions came in during the last three weeks leading up to the April deadline, says Deborah Heindel, director of public relations for Fidelity.
But if you’ve already filed your taxes for 2018 and forgot to move funds to your IRA before doing so, don’t worry, you can file an amended tax return and still get your money back.
The 2018 IRA contribution limit for people under age 50 is $5,500, and $6,500 for people 50 and over. If you're looking for a tax break, make sure you meet the income limits for tax-deductible IRA contributions: If you have a work-based retirement account and you are a single filer, your modified adjusted gross income cannot exceed $63,0000 in order to deduct the full amount up to the contribution limit. If you meet those criteria, your federal taxes could be reduced by roughly $1,375. The income limit for a married couple filing jointly is $101,000 to deduct your full contribution, which means your tax bill could be reduced by roughly $2,750.
If you don't have a 401(k) or equivalent and neither does your spouse (if you're married), there are no income restrictions for your full contribution to be deductible up to the contribution limits.
Keep in mind that the retroactive tax break does not apply to Roth IRAs, since you pay taxes on that money at the point of contribution (not upon withdrawal, like with a traditional IRA).
If you're not necessarily looking to reduce your taxes and your goal is simply to contribute to your traditional IRA, you can do that at any income level. (Roth contributions, on the other hand, have income restrictions.) Since the IRA contribution limit is low, it's a good idea to make deposits every year to boost your retirement savings as much as possible.
Retirement aside, consumers who have an individual or family health plan through the Affordable Care Act marketplaces could possibly benefit by lowering their taxable income for last year. Premium subsidies are based on income, and if you're on the borderline, then reducing your income below the next threshold can bring big savings.
If you're self-employed, you can contribute to a SEP IRA, but your contributions cannot exceed 25% of your compensation or $55,000 for 2018, whichever is less. There's another bonus for people with SEP IRAs: If you file for a tax extension, your deadline to make a contribution to your IRA is also extended by six months, a perk that those with traditional IRAs can't take advantage of.
Don't forget to tell your plan administrator that your IRA contribution is for 2018 and not 2019, says Greene-Lewis. You want to ensure the paperwork is filed properly so your contribution is applied correctly, securing your tax break.
What if you're hesitant to shell out the cash for a retroactive IRA contribution this year? Keep in mind that you're taking care of your future self at the same time. The upside is well worth it if you can afford it, says Greene-Lewis.
"You’re growing your retirement as well as being able to take the deduction, and lowering your taxes," she says.
Instant financial gratification as well as future financial security? Sounds like a win-win to us.