Despite the prevalence of 401k plans offered by many employers, Individual Retirement Accounts – or IRAs as they’re better known as – remain one of the most popular retirement savings tools in America.
It’s not surprising why since IRAs enable almost anyone to save money for retirement – and possibly save on their taxes while doing so.
Traditional IRA Contribution Criteria
The criteria for contributing to an IRA is simple: If you or your spouse earns taxable income in a given year and you’re under 70½ years of age, you can contribute money to an IRA. That’s it!
Whether you can reduce your taxes by contributing to an IRA is a little bit more complicated. This depends on several different factors, starting with your access to a retirement plan where you work. If your employer doesn’t offer a retirement plan (such as a 401k plan), you can deduct the entire amount of your annual IRA contribution on your federal income tax return, which may reduce the amount of taxes you pay.
If your spouse doesn’t work outside the home, he or she can also contribute to a separate IRA and deduct the contribution, up to the annual contribution limit. In 2017 and 2018, this limit is $5,500 or $6,500 if your spouse is 50 years of age or over.
However, if your employer offers a retirement plan, your ability to deduct your IRA contributions will depend on how much money you earn. In this scenario, your deduction will start to phase out once your adjusted gross income (AGI) reaches $63,000 if you’re single or $101,000 if you’re married and file a joint tax return. The deduction vanishes once your AGI reaches $73,000 if you’re single or $121,000 if you’re married and file jointly.
Make Contributions Strategically
The deadline for making contributions to IRAs for tax year 2017 is April 17, 2018. This means you still have time to potentially lower your 2017 tax bill by making a tax-deductible IRA contribution if you qualify. You can even open a new IRA if you don’t have one between now and April 17 and make contributions for tax year 2017.