With the holidays behind us, and winter still holding the land in its icy grip, our thoughts naturally turns toward spring. And spring brings with it the yearly ritual of taxes. In our series on your financial and tax health, we dive into how to navigate the challenge.
Unfortunately, in the world of taxes, by the time you realize there’s a problem, it’s often too late to do anything about it. All we’re left with is lessons to remember for next year. The one major exception to that rule is contributing to a traditional IRA. It’s one of the few steps you can take after the first of the year to reduce your tax burden THIS year.
Contributing to a traditional IRA reduces your taxable income by the amount you put in— up to $7,000 if you’re over 50 ($6,000 is you’re under the age of 50.) So, if you make $50,000 and make a $5,000 dollar contribution, your taxable income is reduced to $45,000, and that’s before subtracting out your standard or itemized deduction.
Of course, there’s a catch. Your possible deduction might be reduced if you (or your spouse) are covered by a retirement plan at work and your income exceeds certain levels. Here’s a table from the IRS to give you an idea if you qualify.
The beauty of this deduction is that you’re not just trying to wriggle out of a tricky tax situation. You’re also saving for your retirement. It’s a win-win! And if that weren’t enough, you can choose to make your contribution for the previous year, all the way up to the filing deadline of April 15th.
Not that’s something to make both you and your bank account feel healthy!