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Although 2023 is long gone, taxpayers still have a valuable opportunity to save on their 2023 income taxes by contributing to a traditional IRA. It’s one of the few things you can still do to reduce last year’s taxes, and it’s an easy step. The deadline to contribute is the day taxes are due, which is April 15, 2024.
However, not everyone can benefit from this strategy and there are strict limits on what you can deduct. Still, you could potentially save a fair chunk of change by funding an IRA.
How much an IRA can save you
For tax year 2023, you can contribute up to $6,500 to an IRA. If you are 50 years or older, you can contribute an additional €1,000, for a total of €7,000. If you meet certain conditions (explained below), you can deduct the full amount from your income. So you do not owe any tax on the amount you deposit into the account.
For example, if you were in the 24 percent federal tax bracket and contributed the maximum $6,500, you would reduce your taxable income by the same amount. This move would reduce your total federal tax burden by $1,560 ($6,500 x 24 percent). And you can save extra money on your state taxes. Essentially, the government pays you money to save.
You can contribute to an IRA even if you have a retirement plan at work, although you may not be able to deduct the full amount of your contribution depending on your income:
- If you and your partner don’t have retirement plans at work, you can take full advantage of the tax savings. The IRS will provide further details on this not covered by a workplace plan.
- If you or your spouse does have a plan at work, the deductibility of your IRA contribution decreases above certain income levels. For example, if your adjusted adjusted gross income for 2023 is less than $73,000, you can deduct the full amount as a single filer. Those who are married and filing jointly can have gross income changes up to $116,000 and still receive full deductibility. (The thresholds will be higher in 2024.)
But things get even better for low-income taxpayers. That’s because there is an extra bonus called the The savings. This can further reduce your taxes, by up to $2,000. This bonus is in addition to the first tax benefit. So you can get both if you meet the income requirements.
What is the deadline to contribute?
You can contribute to an IRA at any time during the calendar year and until tax day of the following calendar year. For example, taxpayers can contribute at any time in 2023 and have until the tax deadline (April 15, 2024) to contribute to an IRA for the 2023 tax year. This means that not only do you have to open the account before this date, but that you must also have deposited money into it.
But this long contribution period means that once you’ve settled your 2023 contributions, you can start contributing for 2024, instead of having to wait until the end of tax season in 2025.
And if you file your tax return before paying your contribution? No problem. As long as you make your IRA contribution before the tax deadline, you can refile your tax return and still get the tax break. It’s a bit of extra work, but definitely worth it for the savings.
Are you eligible for an IRA?
You are eligible for an IRA if you earned income in a specific tax year. However, you may also qualify for a spousal IRA if your spouse had taxable income but you did not.
As mentioned, the contribution limit for 2023 is $6,500, or $7,500 for people over 50. For 2024, the contribution limit will increase to $7,000, or $8,000 for people over 50. However, if your income does not reach this level, you can only contribute up to your taxable income.
While an IRA can save you on taxes, the The tax authorities can impose limits on the tax deduction, depending on your income. Even if you exceed these income levels, you can still contribute to an IRA, but you won’t get a tax benefit. If so, you may be able to take advantage of a backdoor Roth IRA and enjoy one of the best tax-advantaged retirement plans.
Comparing Tax Savings: Traditional IRA vs. Roth IRA
If you’re looking for last-minute tax savings this year, make sure you select the right IRA: the traditional IRA. But you should be careful, because there’s another kind – the Roth IRA – that can help you realize tax savings in the future, rather than today.
The traditional IRA offers you a tax break today in exchange for letting your investments grow tax-free until retirement. When you withdraw your money in the future, you will pay taxes on the distributions.
In contrast, the Roth IRA gives you a future tax benefit because you’re saving after-tax money today. With the Roth IRA, your investments grow tax-free and you won’t pay taxes on qualified withdrawals later.
While these are the most substantial differences between the two IRAs, there are even more differences you’ll want to understand before making your final choice.
In short
While a tax break for this year is a great incentive to make your IRA contribution, the real value of the IRA is its ability to protect your investments from taxes. This way, your investments can be assembled more quickly and you can build a larger portfolio faster. Bankrate’s IRA calculator can help you determine how much your investments can grow over time.
But to achieve that kind of growth, you need to take action before this year’s deadline by opening and funding an IRA by April 15. Brokers are one of the best places to invest your money because of the potentially higher-yielding investments. Bankrate’s broker reviews can help you decide where to open a traditional IRA.
