While 2022 is long gone, taxpayers still have a valuable opportunity to save on their 2022 income taxes by contributing to a traditional IRA. It’s one of the only things you can still do to reduce last year’s taxes, and it’s an easy decision to make. The deadline to contribute is the day taxes are due, April 18, 2023.
However, not everyone can take advantage of this strategy and there are strict limits to what you can deduct. Still, you could potentially save a good chunk of change by funding an IRA.
How much an IRA could save you
For the 2022 tax year, you can contribute up to $6,000 to a IRA. If you’re 50 or older, you can contribute an additional $1,000, for a grand total of $7,000. If you meet certain conditions (explained below), you can deduct the full amount from your income, meaning you won’t owe tax on the amount you put into the account.
If you were in the 24% federal tax bracket, for example, and contributed the maximum of $6,000, you would reduce your taxable income by the same amount. This decision would reduce your overall federal tax burden by $1,440 ($6,000 x 24%). And you could save extra money on your state taxes. In effect, the government gives 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 spouse do not have a retirement plan at work, you will be able to benefit from all the tax savings. The IRS provides more details for those not covered by a company plan.
- If you or your spouse has a plan at work, the deductibility of your IRA contribution decreases above certain income levels. For example, as a single filer, if your adjusted adjusted gross income is less than $68,000 for 2022, you can deduct the full amount. Married people filing jointly can have adjusted gross income up to $109,000 and still enjoy full deductibility. (The thresholds are higher in 2023.)
But for low-income taxpayers, it’s even better. This is because there is an additional bonus called the Savings loan. This could further reduce your taxes, up to $2,000. This bonus is on top of the first tax savings, so you can get both if you meet the income requirements.
What is the deadline for contributing?
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 anytime in 2022 and have until the tax deadline (April 18, 2023) to contribute to an IRA for the 2022 tax year. This means that not only do you have to open the account on that date, but you must also have it funded.
But that long contribution window means that as soon as you’ve settled your contributions for 2022, you can start contributing for 2023, rather than rushing out at the end of tax season in 2024.
How about filing your taxes before paying your dues? Nevermind. As long as you make your IRA contribution before the tax deadline, you can refile your tax return and still get the tax benefit. It’s a little extra work, but well worth it for the savings.
Are you eligible for an IRA?
You qualify for an IRA if you earned income for a particular tax year. However, you can also benefit from a Spouse’s IRAif your spouse had taxable income but you did not.
As mentioned, the contribution limit for 2022 is $6,000, or $7,000 for those over 50. For 2023, the contribution limit increases to $6,500, or $7,500 for those over 50. However, if your income does not reach these levels, you can only contribute up to your taxable income.
While an IRA can save you on taxes, the The IRS may 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 the tax relief. If so, you may be able to take advantage of a Roth IRA backdoor and benefit from one of the best tax-efficient retirement plans.
Tax Savings Comparison: Traditional IRA and Roth IRA
If you’re looking for last-minute tax savings this year, you’ll want to make sure you select the right IRA – the traditional IRA. But you should be careful because there is another type – the Roth IRA – which saves you tax in the future, rather than today.
The traditional IRA today gives you tax relief in exchange for the ability for your investments to grow tax-free until retirement. When you withdraw your money in the future, you will pay tax on the distributions.
In contrast, the Roth IRA gives you future tax relief because you’re saving today with after-tax money. With the Roth IRA, your investments grow tax-free and you pay no tax on qualified withdrawals later.
While these are the most important differences between the two IRAs, there are other differences that you will want to understand before making a final choice.
Don’t delay on your IRA
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 will allow your investments to accumulate faster and you will build a larger portfolio more quickly. Bankrate IRA Calculator can help you determine the size of your investments over time.
But to get that kind of growth, you’ll need to take action before this year’s deadline by opening and funding an IRA by April 18. Brokerages are one of the best places to invest your money due to potentially more profitable investments. Bankrate Brokerage Reviews can help you decide where to open a traditional IRA.