There still may be time to cut your tax bill with an IRA
If you’re getting ready to file your 2021 tax return, and your tax bill is more than you’d like, there might still be a way to lower it. If you’re eligible, you can make a deductible contribution to a traditional IRA right up until the April 18, 2022 filing date and benefit from the tax savings on your 2021 return.
Do you qualify?
You can make a deductible contribution to a traditional IRA if:
You (and your spouse) aren’t an active participant in an employer-sponsored retirement plan, or
You (or your spouse) are an active participant in an employer plan, but your modified adjusted gross income (AGI) doesn’t exceed certain levels that vary from year-to-year by filing status.
For 2021, if you’re a joint tax return filer and you are covered by an employer plan, your deductible IRA contribution phases out over $105,000 to $125,000 of modified AGI. If you’re single or a head of household, the phaseout range is $66,000 to $76,000 for 2021. For married filing separately, the phase-out range is $0 to $10,000. For 2021, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with modified AGI of between $198,000 and $208,000.
Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax-deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59½, unless one of several exceptions apply).
IRAs often are referred to as “traditional IRAs” to differentiate them from Roth IRAs. You also have until April 18 to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA aren’t. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you’re age 59½ or older. (There are also income limits to contribute to a Roth IRA.)
Another IRA strategy that may help you save tax is to make a deductible IRA contribution, even if you don’t work. In general, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner and you’re a homemaker. In this case, you may be able to take advantage of a spousal IRA.
How much can you contribute?
For 2021, if you’re eligible, you can make a deductible traditional IRA contribution of up to $6,000 ($7,000 if you’re 50 or over).
In addition, small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for their returns, including extensions. For 2021, the maximum contribution you can make to a SEP is $58,000.
Contact us if you want more information about IRAs or SEPs. Or ask about them when we’re preparing your return. We can help you save the maximum tax-advantaged amount for retirement.