Tax breaks for savers.
Traditional IRAs allow you to defer paying income tax on the money you set aside for retirement. The April contribution deadline means you can claim a last-minute tax deduction as you are filing your tax return. And IRAs aren’t tied to your job, so you can maintain the same retirement account throughout your career. Here’s how to maximize the value of your IRA.
Maximize the tax deduction.
You can defer paying income tax on up to $5,500 that you contribute to a traditional IRA. The dollar value of this tax deduction depends on your income tax rate, and ranges from $825 for employees paying a 15 percent income tax rate to $1,925 for high earners in the 35 percent tax bracket. Income tax won’t be due on this money until it is withdrawn from the account.
Make catch-up contributions.
Older workers are eligible to save more money in an IRA than their younger counterparts. Workers age 50 and older can contribute an additional $1,000 to an IRA, for a total tax-deductible contribution of $6,500 in 2017.
Meet the contribution deadline.
IRA contributions are due by your tax filing deadline in mid-April. When preparing your tax return you can plug in an IRA contribution to see how much it reduces the tax you owe or boosts your refund. However, when you make a contribution in January through April, you will need to specify whether you want it to be applied to the current calendar year or the previous tax year.
Contribute in each spouse’s name.
Married couples can double their tax deduction if they max out an IRA in each spouse’s name. If only one spouse works, the working spouse can contribute to an account in the nonworking spouse’s name. Your combined contributions to both IRAs can be as much as $11,000 if you’re both under age 50, $12,000 if one spouse is 50 or older and $13,000 if you’re both at least age 50.
Claim the saver’s credit.
Low and moderate income workers who save for retirement are eligible to claim the saver’s tax credit in addition to the tax deduction for their IRA contribution. If your adjusted gross income is below $31,000 as an individual or $62,000 as a couple in 2017, you might be eligible for a tax credit worth between 10 and 50 percent of the amount you contribute to an IRA up to $2,000 for individuals and $4,000 for couples.
Directly deposit your tax refund.
Consider depositing part or all of your tax refund directly into an IRA using IRS Form 8888. You can file a tax return claiming a traditional IRA contribution before the money is actually in the account as long as you make the deposit by the due date of your tax return. If you file early enough, you can use your tax refund to make an IRA contribution you already claimed on your tax return.
Make sure you qualify.
You must have earned income and be younger than age 70 1/2 to be eligible to save in an IRA. If your employer doesn’t provide a 401(k) plan or similar type of retirement account, you can make tax-deductible contributions to an IRA regardless of your income level. However, the tax deduction for IRA deposits is phased out for 401(k) participants with a modified adjusted gross income between $62,000 and $72,000 for individuals and $99,000 to $119,000 for couples in 2017. When only one member of the married couple has a retirement account at work, the tax deduction phases out if the couple’s income is $186,000 to $196,000.
Minimize fees.
IRAs have more investment options than 401(k) plans, which gives you an opportunity to shop around for the lowest cost funds that meet your investment needs. There’s also a 10 percent early withdrawal penalty if you take money out of the account before age 59 1/2, unless you use the money for a couple of specific purposes.
Consider a Roth IRA.
You don’t get an immediate tax break for the money you contribute to a Roth IRA. However, your money grows without being taxed each year and withdrawals after age 59 1/2 from accounts at least 5 years old are tax-free. Long-term Roth account owners can avoid paying income taxes on decades of investment growth.
Check out the myRA.
The myRA has only one investment option, a U.S. Treasury retirement savings bond, and no risk of losing money, which makes it easy to set up and manage. You can have your contribution withheld from your paychecks by your employer, directly deposited from a checking or savings account or use your tax refund to fund the account. However, once you accumulate $15,000 or the account turns 30 years old, you will be required to transfer your balance to a private sector Roth IRA.
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10 Tips to Boost Your IRA Balance originally appeared on usnews.com
