Maximize 2021 Contributions
As we are approaching Tax Day (April 18th), many people find themselves scrambling to get everything ready for their CPA.
Some have had their taxes done for a month now. Some choose to file their own taxes. And still others already know they’re planning on filing an extension and will worry about it come October.
As you get ready for tax time, you may be wondering if there is anything you can still do to reduce your tax burden.
You’re in luck, there is!
A traditional IRA (individual retirement account) is a retirement savings account that is set up at a financial institution that allows you to make tax deductible contributions that grow on a tax-deferred basis.
You can still make a 2021 IRA contribution up until you file your taxes for 2021.
For individuals under 50, you can put up to $6,000 in either a traditional (pre-tax) or Roth (post-tax) IRA. If you’re 50 or older, that number is $7,000.
If you’re married, you can potentially put away $12,000 (under 50) to $14,000 (50+) in an IRA.
How Does This Help My Taxes?
Every dollar that you put into a pre-tax IRA reduces your taxable income by that same amount.
For example: Let’s say you’re married, under 50, self-employed, and your AGI (adjusted gross income) is going to be $150,000.
If you and your spouse both max out a traditional IRA, you will reduce your AGI amount by $12,000. Now your AGI would be $138,000.
Based on 2021 tax rates, this would save you $2,640 in taxes with the added benefit of knowing you just saved $12,000 for your future.
Health Savings Account (HSA)
Another way to accomplish the same goal (reducing previous year taxes) is to fund your HSA for 2021.
As we’ve covered before, not everyone has access to an HSA, but if you do, this is a great option.
For 2021, the maximum amount an individual under 55 can contribute to their HSA is $3,600 with the family cap being $7,200.
For those 55 and older, the individual max amount is $4,600 with the family cap being $8,200.
All money contributed to an HSA is treated the same as the traditional IRA above. You receive a reduction in income for every dollar you contribute.
For more information on HSAs, click here.
What about Roth?
You can still contribute to a Roth IRA for 2021 up until you file your taxes as well. The contribution limits are the same as the pre-tax IRA.
The major difference is that you will not get a tax deduction on your 2021 return. The Roth IRA is a post-tax savings.
The benefit to the Roth IRA is that you will get tax-deferred growth and won’t have to pay taxes later when you take the money out (after 59.5).
There is no concrete rule on which is the better place to save, but it is often said that the lower your tax bracket now, the more beneficial a Roth is. The opposite is that the higher your tax bracket now, the more beneficial a traditional IRA is.
You can also save into both a Roth and traditional IRA. The $6,000 limit is still the same between the two accounts combined.
Did You Know?
There are limitations on who can contribute directly to a Roth IRA and who can make deductible contributions to a traditional IRA. They are generally based on your income and access to an employer sponsored retirement plan.
Consult your financial planner, CPA, or do some research before making any decisions for yourself.
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