Tax time is upon us, and the April 15th deadline is quickly approaching. If you're looking for an opportunity to potentially save some money on your taxes this year, an Individual Retirement Account (IRA) could be the answer. An IRA is a great way to save for retirement, but it can also provide some tax savings in the short term. Whether you're already contributing to an IRA or considering opening one, it's important to understand the potential tax savings an IRA can offer.
Don't leave money on the table. Find out more about how an IRA could help you save on taxes this year.
Understanding IRA Tax Savings
One of the main ways IRAs offer tax savings is through the ability to make contributions with pre-tax dollars. This means that the money you contribute to your IRA is deducted from your taxable income for the year, reducing the amount of income subject to taxes. For example, if you contribute $5,000 to your IRA and your income is $50,000, you will only be taxed on $45,000. This can lead to substantial savings, especially for individuals in higher tax brackets.
Types of IRAs
It’s important to understand that there are different types of IRAs available. Each has different benefits and rules that you’ll want to align with your savings goals. The top 4 include:
- Traditional IRA: This is the most common type of IRA. Contributions to a traditional IRA are typically tax-deductible, meaning you can deduct them from your taxable income for the year. When you withdraw money from a traditional IRA during retirement, you will have to pay taxes on those distributions.
- Roth IRA: Unlike a traditional IRA, contributions to a Roth IRA are not tax-deductible, which means you won’t reduce the amount you pay the IRS in 2024. However, the earnings within a Roth IRA grow tax-free, and qualified withdrawals are tax-free as well.
- SEP IRA: A Simplified Employee Pension (SEP) IRA is designed for self-employed individuals and small business owners. It allows you to contribute a percentage of your net earnings from self-employment, up to a certain limit. Contributions to a SEP IRA are tax-deductible, and the earnings grow tax-deferred until withdrawal.
- SIMPLE IRA: The Savings Incentive Match Plan for Employees (SIMPLE) IRA is another option for small business owners. It allows both employers and employees to contribute to the account. Contributions to a SIMPLE IRA are tax-deductible, and the earnings grow tax-deferred until withdrawal.
Eligibility and Contribution Limits
When it comes to opening an IRA and maximizing your tax savings, it's important to understand the eligibility requirements and contribution limits. Anyone with earned income can contribute to an IRA, regardless of age. For 2024, the maximum contribution limit for both traditional and Roth IRAs is $7,000 for individuals under 50 years old, with an additional catch-up contribution of $1,000 for individuals 50 years old and above.
These limits may change each year, so it's important to stay updated. It’s also important to keep in mind that if you have multiple IRAs, the contribution limits apply to the total combined contributions across all accounts. A financial advisor or tax professional can help you determine your eligibility based on your specific situation.
How to Maximize Your IRA Tax Savings
If your goal is to maximize your IRA tax savings, here are some initial strategies to consider:
- Contribute the maximum amount: Take full advantage of the contribution limits allowed for your chosen tax-deductible IRA type. By contributing the maximum amount, you can maximize your potential tax deductions all while growing your retirement savings.
- Automate your contributions: Set up automatic contributions to your IRA from your paycheck or bank account. This ensures that you won't forget to contribute and helps you maintain consistency in building your retirement savings. Additionally, automating your contributions allows you to take advantage of dollar-cost averaging, which can help mitigate the impact of market volatility.
- Revisit and adjust your contributions annually: As your income or financial situation changes, it's important to reassess your IRA contributions and adjust accordingly. By taking advantage of any increases in income or changes in tax laws, you can optimize your IRA tax savings and maximize your retirement funds.
- Explore catch-up contributions: If you're 50 years of age or older, you can make additional catch-up contributions to your IRA. These contributions allow you to save more for retirement while benefiting from the same tax advantages.
Don't Leave Money on the Table: Save on Taxes with an IRA
If you're looking to maximize your tax savings this year, consider opening a tax-deductible IRA or contributing to your existing IRA account. With the right approach, you could reduce your current tax bill and grow your retirement savings, putting more of your hard-earned money back into your pocket.
At Lakeland Bank, we offer Individual Retirement Account options to help you get started.
Please note that every person's situation is unique. Consult your tax advisor for advice for your individual circumstances.
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