Filed under: Taxes, Retirement Plans, IRA, Tax Deductions
For example, if you are in the 35 percent tax bracket, are under 50 years old and make the maximum $5,500 contribution for 2014, you can save as much as $1,925 in federal taxes. If you are over 50, you can make a $6,500 contribution, thereby saving even more. If you are in the 15 percent tax bracket, you could still save about $975. And that's just federal tax savings. In states with an income tax, retirement savers receive a bigger tax benefit.
If you are in a low tax bracket, you may prefer contributing to a Roth IRA over a traditional IRA. However, if you want to pay less in taxes right now, the traditional IRA is a great choice.
The ability to deduct contributions to a traditional IRA is limited by your income level. However, if you or your spouse is not covered by a retirement plan at work, in many cases your entire contribution will be tax-deductible.
Situations in Which You Might Qualify for a Full Tax Deduction
- Self-employed: My husband and I are deducting $12,000 from our 2014 income as we are both self-employed. That will reduce our state and federal tax bill a lot. He is over 50 so he can deduct $6,500, while I can deduct $5,500. I plan to establish a SEP IRA next year so I can contribute even more in future years.
- Unemployed but married to someone who earns income: If you or your spouse does not work but the other does, don't forget the Spousal IRA. You can deduct your full contribution to a spousal IRA in 2014 if you as a couple have an adjusted gross income of $181,000 or less.
- Employed but not eligible for your employer's retirement plan: Lots of companies make new employees wait before being allowed to contribute to a 401(k) plan, commonly six months. In this case your IRA contribution may be fully tax-deductible.
Quick, Easy Way to Get This Done Before the April 15 Deadline
If you don't already have an IRA for tax-deductible contributions, you can easily set up a traditional IRA with an online brokerage firm. I hold mine at TD Ameritrade. The account application takes only 10 to 15 minutes to complete, and there is no annual maintenance charge or non-activity fee. You can fund the account electronically from your checking or savings account.
No time to decide how to invest the money? Don't worry. Depending on the amount you deposit, you may get access to commission-free trades for a certain period after funding your account -- which is a nice bonus when you want to build a diversified portfolio of stocks and exchange-traded funds. This way you can get past the crunch time, do some research and come back a few weeks later to place the trades commission-free. For example, TD Ameritrade offers over 100 ETFs commission-free if you expect to add funds in the future.
Figuring out how to invest money can be overwhelming. One way to start is to complete a quick survey that measures your risk tolerance. This neat calculator helps translate your investment risk tolerance into a sample portfolio allocation. While I don't endorse or recommend the sample allocations the algorithm generates since every individual has unique needs and circumstances, this is a good starting point. Once you know the general buckets you want, you can search for stocks, bonds, low-fee ETFs or mutual funds to match them and allocate based on percentages that work for you.
The information contained herein is strictly for educational and illustrative purposes, providing commentary, analysis, opinions and recommendations, and should not be considered investment advice for any specific subscriber or portfolio or an offer to sell or a solicitation to buy any security. Please consult a qualified tax advisor with regard to your personal circumstances.
