Reduce Your 2018 Taxes and Secure Your Future in 1 Step
February 7, 2019 |
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If you’re one of the tax early birds and you’ve already calculated how much you’re going to owe to the government, or if you just have a feeling you won’t be getting a federal refund, then have we got some good news for you. And despite how simple it is, it’s really not too good to be true.
In one easy step, you may be able to reduce your 2018 taxes while also setting yourself up for the future. All you have to do is open (or contribute to) a traditional IRA before April 15, 2019.
What is a Traditional IRA?
An IRA, or individual retirement account, is an account that allows you to save for your retirement. With a traditional IRA, you can contribute up to $5,500 a year ($6,500 if you’re over the age of 50) with pre-tax dollars, meaning you won’t pay taxes on the money in your account until you withdraw it in retirement. The money you invest in an IRA account grows over time to give you a reliable nest egg for your retired years — assuming you contribute annually.
How Will a Traditional IRA Help Reduce My Taxes?
By contributing to a traditional IRA, you can reduce your tax bill significantly. For example, say you’re a 35-year-old and you’re in the 24% tax bracket. If you contribute the max of $5,500 to a traditional IRA, you can reduce your tax bill by $1,320 (or 24% of $5,500).
Because the government allows you to contribute to a traditional IRA for 2018 up until Tax Day 2019 (April 15), you can wait and see what your tax bill will be before deciding whether or not this is the right idea for you. We highly recommend everyone have a retirement plan — whether it’s through a 401k at work or an IRA you set up yourself or both — but you can decide which and when is right for you.
Are There Any Rules?
Like with most things, there are rules with regards to using a traditional IRA to lower your tax bill. High earners are typically prohibited from claiming tax deductions on contributions to IRAs and 401k accounts. And depending on how much you earn, you might only be able to claim a tax deduction for part of your IRA contribution, as there’s a “phase out” as income increases.
If you’re eligible for a company retirement plan, you won’t be eligible for the IRA deduction. And if your adjusted gross income (AGI) for 2018 is $63,00 or more for singles or $101,000 for married couples filing jointly, then you won’t be eligible either. Check out this article for all the rules and details for IRA deductions.
If you have a Roth IRA, then you won’t be able to claim a deduction since these accounts use post-tax funds, meaning you’ve already paid taxes on them and can withdraw your funds tax-free when you reach retirement age.
Is a Traditional IRA a Good Idea?
For a number of people, yes, opening a traditional IRA is a great idea. It will help you secure your future by saving money for your retirement, and give you a break on your taxes, so long as you stay within the requirements. Plus, since you have the option to open one up until Tax Day, it gives you some flexibility to decide.
If you need help deciding if a traditional IRA is right for you, speak with a Dime representative at 1-800-321-DIME (3463). We’ll help you understand all of your options and do the best for your future.