Can I buy an IRA to lower my taxes?
Traditional IRA contributions reduce your taxable income dollar for dollar, and if you contribute enough, they may drop you into a lower tax bracket. This can lower your 2023 tax bill and lead to you getting more money back in your tax refund.
You may be able to deduct some or all of your contributions to a traditional IRA. You may also be eligible for a tax credit equal to a percentage of your contribution. Amounts in your traditional IRA, including earnings, generally aren't taxed until distributed to you.
The money deposited into a traditional IRA reduces your adjusted gross income (AGI) for that tax year on a dollar-for-dollar basis, assuming it is within the annual contribution limits (see below). So a qualifying contribution of, say, $2,000 could reduce your AGI by $2,000, giving you a tax break for that year.
You may be able to take a tax credit for making eligible contributions to your IRA or employer-sponsored retirement plan. Also, you may be eligible for a credit for contributions to your Achieving a Better Life Experience (ABLE) account, if you're the designated beneficiary.
Consider a Roth IRA
In general, if you think you'll be in a higher tax bracket when you retire, a Roth IRA may be the better choice. You'll pay taxes now, at a lower rate, and withdraw funds tax-free in retirement when you're in a higher tax bracket.
There are a few methods recommended by experts that you can use to reduce your taxable income. These include contributing to an employee contribution plan such as a 401(k), contributing to a health savings account (HSA) or a flexible spending account (FSA), and contributing to a traditional IRA.
- Financial gifts received from others.
- Disability insurance payments.
- Qualified withdrawals from a Roth IRA account.
- Selling your home and meeting the requirements to exclude the gain.
- Qualified municipal bonds interest income.
Your income could be too high for a Roth IRA
Higher income levels can reduce the amount you're allowed to contribute to a Roth IRA or make you ineligible for the year. If you're a single filer, for instance, your modified adjusted gross income (MAGI) must be below $138,000 for 2023 to contribute the maximum amount.
Roth individual retirement accounts (Roth IRAs) are open to anyone who earns income in a given tax year, as long as they don't earn too much or too little. If your income is too high, you are barred from contributing to a Roth IRA.
Traditional IRA benefits include a tax break right now
Traditional IRAs offer the key advantage of tax-deferred growth, meaning you won't pay taxes on your untaxed earning or contributions until you're required to start taking minimum distributions at age 73.
How much will a Roth IRA reduce my taxes?
While Roth IRAs don't lower your taxes when you contribute, they allow your money to grow tax-free indefinitely. Eliminating the taxes from your earnings can make a significant difference in your investment balance over time.
Depending on the type of IRA you have, you may need Form 5498 to report IRA contribution deductions on your tax return. Form 5498: IRA Contributions Information reports to the IRS your IRA contributions for the year along with other information about your IRA account.
The retirement savings contribution credit — the "saver's credit" for short — is a nonrefundable tax credit worth up to $1,000 ($2,000 if married filing jointly) for mid- and low-income taxpayers who contribute to a retirement account.
The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts. Of these, fixed annuities usually provide the best interest rates.
If you have short-term savings goals, like to help pay for your wedding, a CD is likely the better fit. If you are saving for retirement, an IRA can offer better returns over the long run.
To come out even in terms of after-tax savings, you have to be disciplined enough to invest the traditional IRA tax savings you get every year back into your retirement savings. If that seems unlikely to happen, then you'd be better off saving in a Roth, where you'll arrive at retirement with more after-tax savings.
- Buy Municipal Bonds.
- Sell Inherited Real Estate.
- Set Up a Donor-Advised Fund.
- Use a Health Savings Account.
- Tax Residency Planning.
- Pay Your Property Taxes Early.
- Fund 529 Plans for Your Children.
- Invest in an Opportunity Zone.
- Self-employment taxes. ...
- Home office expenses. ...
- Self-employed health insurance premiums. ...
- Self-employed retirement plan contributions. ...
- Vehicle expenses. ...
- Cell phone expenses.
Most retirement experts recommend you contribute 10% to 15% of your income toward your 401(k) each year. The most you can contribute in 2023 is $22,500 or $30,000 if you are 50 or older (that's an extra $7,500). That number has only been increased by $500 for the 2024 tax year.
There is no age limit to open a Roth IRA, but there are income and contribution limits that investors should be aware of before funding one.
When should you not open an IRA?
If you're over 70 ½, you can no longer make contributions to a traditional IRA, but you can make rollover contributions. If you're under 70 ½, you can keep on making those contributions.
Are You Too Old for a Roth IRA? There is no maximum age limit to contribute to a Roth IRA, so you can add funds after creating the account if you meet the qualifications. Roth IRAs can provide significant tax benefits to young people.
A beneficiary who wants to disclaim inherited IRA assets must file a qualified disclaimer with your financial organization by the later of nine months after the IRA owner's death, or nine months after the date on which the beneficiary turns 21.
Unearned Income is all income that is not earned such as Social Security benefits, pensions, State disability payments, unemployment benefits, interest income, dividends, and cash from friends and relatives. In-Kind Income is food, shelter, or both that you get for free or for less than its fair market value.
How much does it cost to open an IRA? There isn't typically an opening fee, though there are a few potential up-front costs. Some brokers and robo-advisors require a minimum amount to open an account, so you'll either have to come up with that dollar figure or choose a different provider.
