Written by Ed Bradley, CFP^®, ChFC^®

It’s tax season, and that means many individuals are looking for opportunities to reduce their taxable income and increase their retirement savings. As we head towards the tax filing deadline, it’s important to consult with your financial advisor and tax advisor on your specific situation.

Here are a few high-level ideas that may spark a conversation:

Traditional IRA contribution

• Why consider a Traditional IRA?
  • With a Traditional IRA, you may get immediate tax benefits, but you’ll have to pay ordinary income tax on your deductible contributions and earnings when you take money out in retirement.
• Things to consider:
  • Tax Year 2023 – $6,500 if you’re under age 50; $7,500 if you’re age 50 or older.
  • Tax Year 2024 – $7,000 if you’re under age 50; $8,000 if you’re age 50 or older.
  • Deductible contributions: Depending on your income level ($83,000 in tax year 2023 if you are single, and $136,000 if you are married filing jointly) or if you don’t have an employer-sponsored retirement plan, your contribution may be fully deductible.
• Deadline: You can contribute to your IRA for 2023 through the tax filing deadline in April 2024.

ROTH IRA contribution

• Why consider a ROTH IRA?
  • Contributions are made with after-tax dollars, so they will not reduce taxable income. However, once the funds are in the ROTH IRA they grow tax-free and can be distributed as tax-free income in the future.
  • If you expect to be in a similar or higher tax backet in the future, or you expect tax brackets to move higher in the future, or if you have a long runway until you will take distributions, a ROTH IRA contribution may be most appropriate.
• Things to consider:
  • 2023 ROTH IRA maximum contribution is $6,500 ($7,500 if you are over age 50). 2024 ROTH IRA maximum contribution is $7,000 ($8,000 if you are over age 50).
  • Contribution rules:
    • If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $153,000 for tax year 2023 and $161,000 for tax year 2024 to contribute to a Roth IRA, and if you’re married and file jointly, your MAGI must be under $228,000 for tax year 2023.
  • With the passage of SECURE 2.0 Act, effective 1/1/2024 you may also be eligible to contribute to your Roth IRA using 529 rollover assets.

FAQs:

• Can a minor contribute to an IRA? Minors can contribute to an IRA based only on the limits of their own earned income, and not that of their parents.
• Can I contribute to an IRA for a spouse? Yes, you can contribute to an IRA for unemployed non-working spouse that you file jointly with, but your total combined contribution can’t exceed either your joint taxable income or double the annual IRA limit, whichever is less.
• What is the deadline to make an IRA contribution? The deadline to contribute to your Roth IRA is typically April 15 of the following tax year. However, it is better to contribute earlier rather than later, so you can take advantage of tax-free growth potential for a longer period of time.

We know this can be a busy time of year while you prepare to file your taxes, so please reach out to us with any questions you may have! We are here to help you make the best decisions based on your situation.

Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.