Putting a portion of your annual earnings into an Individual Retirement Account can carry a number of benefits. Boelman Shaw Tax & Financial Planning in Des Moines offers the following tips on making the most of your IRA contributions this year.
Know Your Limits
In order to make cash contributions to a traditional IRA, you must be under age 70 ½ by the end of the tax year. You may make rollover contributions or contributions to a Roth IRA, however, regardless of your age.
For 2023, the maximum Roth IRA contribution and the maximum deductible contribution to a traditional IRA is $6500 for those 49 and younger and $7500 for those who are at least 50. Contributions may not exceed your taxable compensation for the year.
Income limits apply to IRA contributions. As a single filer, you may make the maximum contribution to a Roth IRA if your income falls below $129,000 and a reduced contribution if it is between $129,000 and $144,000. For married joint filers, the limits are $204,000 and $214,000. Traditional IRAs do not have contribution limits, but the portion of your contribution that is tax deductible depends upon both your income and whether you have a retirement plan through your employer.
You may contribute to your IRA at any time during the year and continue to make contributions up to the tax filing deadline for that year. For example, for the tax year 2022, you can make IRA contributions between January 1, 2023, and April 18. If you make contributions between January 1 and April 18 of the same calendar year, you should contact your plan sponsor to ensure they are applied to the correct tax year.
Understand Your Taxes
Traditional IRA funds are typically taxed only upon withdrawal. Deposits to a Roth IRA are made post-tax, so no tax applies at the time of distribution as long as you follow the rules. You may withdraw contributions to your Roth IRA at any time without penalty, but you may withdraw earnings only after age 59 ½ and after the account has been open for a minimum of five years, except for specified reasons, such as educational or medical expenses, first home purchase, or disability. See IRS Publication 590, Chapter 2: Roth IRAs for a complete list of qualified distributions from Roth IRAs.
Take Advantage of the Benefits
A tax credit known as the Saver’s Credit is available for low-to-moderate income filers who make contributions to qualified retirement savings plans, including IRAs and 401(k)s. The maximum credit available is $1000 for an individual or $2000 for a married couple filing jointly. The amount of credit you may take depends upon your income, filing status, and the amount you have contributed toward your retirement fund during the tax year.
The income limits for claiming the Saver’s Credit are $68,000 for a married couple filing jointly, $51,000 for heads of household, and $34,000 for single filers. Depending upon your income level, you may be able to take the credit for 10-50% of the amount you have contributed to your retirement plan. See IRS Form 8880 for details and to file for the Saver’s Credit.
Boelman Shaw Tax & Financial Planning in Des Moines can answer your IRA and other retirement plan questions. Call 515-225-1185 today to discuss how to make the most of your retirement savings.
Tax and accounting services provided through Boelman Shaw & Company, LLC. Advisory services provided through BSC Capital Partners, LLC a state of Iowa registered investment advisor.