It's not too late to significantly reduce your tax bill or boost your refund by making a contribution to an individual retirement account. IRA contributions for tax year 2013 can be made until April 15, 2014, and often result in a big tax savings.
You are able to defer paying income tax on the amount you contribute to a traditional IRA, which lowers your tax bill almost immediately. Workers can defer taxes on contributions of up to $5,500 to an IRA for 2013. Individuals age 50 and older can contribute an additional $1,000 per year in catch-up contributions.
[See: What Everyone Should Know About IRAs .]
The amount of your tax reduction depends on the amount you contribute and your tax rate, with the biggest tax breaks going to people with the highest incomes who save the most. For example, a worker in the 25 percent tax bracket who contributes $5,500 to an IRA would save $1,375 on his current tax bill. A 55-year-old worker in the 15 percent tax bracket who contributes $6,500 would save $975. And that's just federal tax savings. In states with an income tax, retirement savers could save additional money on their state tax return.
If you use tax preparation software, you can type in a hypothetical IRA contribution to see exactly how much you will save on your tax bill. "When you finish your tax return, take a look at the amount that you are getting back or owe, and then go back and plug in that $5,500 IRA contribution. When you see the difference, then you'll realize that it makes sense to do the IRA," says Louis Barajas, a certified financial planner in Santa Fe Springs, Calif. "By avoiding paying the tax, you are earning interest on that tax you would have paid."
When you make an IRA deposit, remember to indicate which tax year a contribution should be applied to. Financial institutions are allowed to automatically apply contributions to the calendar year in which they are received unless you specify otherwise. You can also file a return claiming a traditional IRA deduction before the money is in the account, as long as you make the contribution by your tax filing deadline.
Most IRA providers see a surge of contributions in the months leading up to the tax filing deadline. Fidelity says between 35 and 40 percent of all IRA contributions are made in March and April each year, and Vanguard also reports big springtime spikes in contributions. Fidelity says it will accept IRA contributions for 2013 that are received up until April 15. "As long as your envelope is postmarked by the 15 th, even if it takes a little while to get to us, we will still process it as a prior year contribution," says Ken Hevert, vice president of retirement products at Fidelity. "We scan an image of the envelope so that we have some evidence that it was in fact postmarked by the 15 th."
Still, it's a good idea to turn in the paperwork or get the electronic contribution started at least a few days before the deadline. "There's a huge influx of contributions at the last minute relative to what we see throughout the year, and everything tends to get very busy at that point, and you run the risk of technology issues," says Maria Bruno, a certified financial planner and senior investment analyst at Vanguard. "If you do it sooner, you have more time to deal with the unexpected, and you don't run the risk of forgetting." While some retirement savers who are close to the IRA income limits purposefully delay their IRA contribution to see if they will qualify for the tax deduction, others simply procrastinate.
Individuals who are not eligible for a workplace retirement account can earn any amount and still claim the tax deduction for their IRA contributions. However, if you have a 401(k) or similar type of retirement account at work, you may not qualify for an additional tax deduction for your IRA contributions. The tax deduction is phased out for individuals with workplace retirement accounts who had modified adjusted gross incomes between $59,000 and $69,000 in 2013 ($95,000 and $115,000 for couples). For savers who don't have access to a retirement account at work but are married to someone who does, the tax deduction is phased out if the couple earns between $178,000 and $188,000.
Older workers also lose their ability to participate in an IRA after age 70. Contributions can no longer be made to a traditional IRA in the year you turn 70½ or any later year. So, people born on or before June 30, 1943, cannot contribute to a traditional IRA for tax year 2013 or any later year.
For workers with low and moderate incomes, making an IRA contribution is an even better deal. In addition to the tax deduction, workers earning up to $29,500 for individuals, $44,250 for heads of household and $59,000 for couples in 2013 who contribute to an IRA are eligible for the saver's credit. This tax credit is equal to 50 percent, 20 percent or 10 percent of your IRA contributions up to $2,000 ($4,000 for couples), with the largest credit going to people with the lowest incomes. The saver's credit can be worth as much as $1,000 for individuals and $2,000 for couples, but averaged $128 for individuals and $215 for couples in 2011. "It's one of the few full-on tax credits that is available to most Americans," says Catherine Collinson, president of the Transamerica Center for Retirement Studies. "Even if someone can only claim $10 or $20, that's still meaningful."
Putting money into an IRA will get you a nearly immediate tax break, but it's also important to make sure you choose investments that will keep your money growing. "An IRA is just a bucket where you are going to invest your money," Barajas says. "Now you have to find a suitable investment."
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