Want One More 2022 Tax Deduction? Max Out Your IRA Contribution
By Mark Yatros
Even though we’re almost a fourth of the way into 2023, you can still arrange for an additional deduction on your 2022 taxes. All you need to do is contribute to an existing Individual Retirement Account or open a new one.
IRAs are one of the most attractive savings vehicles available, no matter where you are on your retirement investment journey. One of the most significant benefits of IRAs is reducing your taxable income for the year by contributing before the tax filing deadline. The deadline for 2022 tax returns is April 18, 2023.
Benefit from Tax Deductions Now and in the Future
The IRS limits how much you can contribute to an IRA each year. For 2022, the maximum contribution limit is $6,000, or $7,000 if you’re 50 or older. But don’t let the limit fool you — some of these contributions have a double benefit: They lower your taxable income now and grow tax-free, so you can benefit from them when you retire.
Choose the Right Type of IRA for Your Needs
When it comes to contributing to an IRA, you have several options. Before you decide on the type of IRA to open, it’s essential to determine your goals and lifestyle.
My team and I are happy to help you figure out which IRA is right for you. You can schedule a free consultation with us here. In the meantime, here are four of the most popular types of IRAs and how they work:
Traditional IRA: The Traditional IRA offers tax-deferred growth on your investments and tax deductions for your contributions. The downside is that you’ll be taxed when you withdraw the money in retirement. However, if you are in the same or a lower tax bracket in retirement (as many people expect to be), you’ll pay lower taxes on the money you invest now. You’ll receive immediate tax benefits from a Traditional IRA because your taxable income is reduced (there are income limitations for those in employer-sponsored plans). You can begin withdrawing money from your Traditional IRA after age 59½ and must begin withdrawals by age 72.
Roth IRA: A Roth IRA allows your investments to grow tax-free and allows you to withdraw the money tax-free in retirement. The downside is that you don’t get an immediate tax deduction for your contributions. Roth IRAs are best if you expect to be in a higher tax bracket when you begin withdrawing the money because you’ve already paid taxes on your contributions, so withdrawals are tax-free. Like Traditional IRAs, you can start withdrawing from your Roth IRA at age 59½, but unlike Traditional IRAs, there is no set age for when you must begin making withdrawals.
Simplified Employee Pension (SEP) IRA: A SEP IRA is like a Traditional IRA but is explicitly designed for self-employed individuals and small business owners. This type of IRA offers tax-deferred growth and a tax deduction for your contributions. An advantage of SEPs is that they have a higher annual contribution limit than other retirement accounts. You can contribute up to 25% of your compensation or $66,000 in 2023. Another benefit of SEP IRAs is that they are inexpensive to start and administer.
Spousal IRA: Spousal IRAs allow one spouse to contribute to an IRA on behalf of the other spouse. Because IRS rules say you must earn an income to contribute to an IRA, the Spousal IRA is a workaround for couples where one doesn’t work outside the home or earns a very low income. This way, both spouses can take advantage of the tax benefits of an IRA and save for their retirement together. The contribution limits for a Spousal IRA are the same as a traditional or Roth IRA, and the contributions can come from either spouse’s income.
Maximize Your IRA Contributions
No matter which type of IRA you choose, making the maximum contribution possible each year can help you amplify your tax savings and assist you in reaching your financial goals faster.
The Allegiant Wealth Strategies team would be happy to help you determine which type of IRA investment is best for your situation. Contact us at 269-218-2100 or here.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Allegiant Wealth Strategies offers securities and advisory services through Commonwealth Financial Network®, Member FINRA/SIPC. Allegiant Wealth Strategies has offices in Battle Creek and Portage, Michigan, from which we serve Calhoun County, Kalamazoo County, and Kent County (Grand Rapids). The Allegiant Wealth Strategies team offers no-obligation financial planning consultations; call 269-218-2100 or contact us here.