As the tax deadline for 2023 looms closer, many are exploring ways to reduce their tax bill and enhance their retirement savings. A pivotal strategy in this endeavour is making a last-minute contribution to an Individual Retirement Account (IRA). This article delves into the key benefits and strategies for optimizing your IRA contributions, offering insights from financial experts Georgia Lord and Kathryn Kubiak-Rizzone, among others.
Reduce Your 2023 Tax Bill
Making an IRA contribution can significantly lower your tax bill. For instance, a 24% tax rate payer contributing $6,500 to an IRA could see a $1,560 reduction in federal income tax. Georgia Lord of Corbett Road Wealth Management emphasizes the dual benefits: reducing taxes owed and potentially increasing your refund.
Watch Out for IRA Income Limits
Income limits can affect your eligibility for tax deductions on IRA contributions. With varying thresholds based on individual and marital status and whether you or your spouse has access to a workplace retirement plan like a 401(k), understanding these limits is crucial.
Defer Income Tax on Investment Gains
IRAs offer the benefit of deferring income tax on investment gains. This means you won’t pay taxes on the gains until the money is withdrawn, potentially at a lower tax rate in retirement.
Create Tax-Free Retirement Income With a Roth IRA
Roth IRAs allow after-tax contributions, with the advantage of tax-free withdrawals in retirement, including on investment earnings. This is an attractive option for those within certain income limits.
Use Your Tax Refund to Fund an IRA
You can deposit part or all of your tax refund into an IRA using IRS form 8888. Kubiak-Rizzone reminds contributors to invest the money in their accounts to ensure it grows over time.
Make Sure Your IRA Contribution Is Applied to the Correct Tax Year
It’s crucial to ensure that your contribution is applied to the 2023 tax year, as financial institutions may default to the calendar year of receipt.
Avoid Spending Temptations
While IRAs make it harder to access funds before retirement age, they also offer various exceptions to early withdrawal penalties for urgent financial needs.
Qualify for the Saver’s Credit
Low to moderate-income individuals and couples might be eligible for the saver’s credit, which offers an additional financial benefit for IRA contributions.
Making a last-minute IRA contribution can be smart, providing immediate tax benefits and long-term retirement security. With expert advice and careful planning, taxpayers can navigate the complexities of IRA contributions to optimize their savings and secure a more comfortable retirement.
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