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Save on 2018 Taxes with an IRA

Save on 2018 Taxes with an IRA

Did you know you still have time to save on 2018 taxes? You can still lessen your tax bill by contributing to an Individual Retirement Account, or IRA. No one likes to pay a hefty tax bill. But even more than that, everyone wants a big refund! By contributing to an IRA for 2018, you can lower your tax bill and possible see a nice refund. No IRA? No problem! You have until April 15, 2019 to open and fund an IRA for 2018. Here, we’ll give you the lowdown of how this works and what you need to do to save on 2018 taxes!

Open and Fund an IRA

Obviously, the first step is opening an IRA, if you don’t already own one. IRAs can be opened at most financial institutions, including banks, credit unions and trust companies. IRA Financial can help set up your first IRA. Once you have your IRA set up, you can then fund it. To contribute to an IRA, you must have earned income for 2018. Typically, this comes from a salary you earn from your job. Other types of earned income include self-employment wages, union strike benefits and long-term disability payments. Income that is not earned does not count. This includes alimony, child support, social security and unemployment benefits (among others). One last thing to note is that if you do not have earned income, but your spouse does, he or she may contribute on your behalf. This is known as a Spousal IRA.

For 2018, the total amount you can contribute is $5,500 if you are under age 50 and $6,500 if you are age 50 or older. However, if your earned income is less than these numbers, that is the maximum you may contribute. For example, if you are a college student who earned $3,000 working a summer job, the maximum you can contribute is $3,000. The total amount that a couple can contribute is $11,000/$13,000. Important Note: Be sure to make it known you are contributing for 2018. You don’t want to make the mistake of contributing for 2019 (which you still should do!). Only contributions for last year will impact your current tax return.

Will I Save on 2018 Taxes?

The big question is, if I do contribute to an IRA for 2018, will my tax bill definitely be lowered? That depends on how much money you make and if you (or your spouse) is covered by a workplace plan, such as a 401(k).

If YOU are covered by a workplace plan, the following phaseouts are in effect:

Single/Head of Household –

  • Full Deduction if your income is less than $63,000
  • Partial Deduction if your income is between $63,000 and $73,000
  • No Deduction if your income is above $73,000

Married Filing Jointly/Qualifying Widow(er) –

  • Full Deduction if your income is less than $101,000
  • Partial Deduction if your income is between $101,000 and $121,000
  • No Deduction if your income is above $121,000

Married Filing Separately –

  • Partial Deduction if your income is less than $10,000
  • No Deduction if your income is $10,000 or more

If YOUR SPOUSE is covered by a workplace plan, the following phaseouts are in effect:

Married Filing Jointly –

  • Full Deduction if your income is less than $189,000
  • Partial Deduction if your income is between $189,000 and $199,000
  • No Deduction if your income is above $199,000

Married Filing Separately –

  • Partial Deduction if your income is less than $10,000
  • No Deduction if your income is $10,000 or more

As you can see, you have to earn decent salary to not be able to deduct your IRA contributions. However, you should still contribute even if you don’t get a deduction.

Other Benefits of Contributing to an IRA for 2018

We’ve been talking about one benefit of contributing to an IRA, lessening your tax hit. However, that’s not the only benefit of an IRA. The most important benefit of a traditional IRA is tax-deferred growth. From the first time you contribute, until you retire, your IRA funds continue to grow unimpeded. You won’t pay taxes until you start withdrawing funds during retirement, no matter how large your IRA grows from year to year. Further, the power of compounding doubles up the benefit. Because of this remarkable feature, the more you can contribute and the earlier you do so, the more earning power your money has. As we just mentioned, even if you don’t get a deduction, it makes sense to fund your 2018 IRA. Plus, you still have until Tax Day 2020 to fund your IRA for 2019.

Since we are “Self-Directed Retirement Experts”, I just wanted to briefly touch on the benefits of a Self-Directed IRA. IRA Financial Group, in partner with our IRA custodian, IRA Financial Trust, is excited to teach new people the power of alternative investing. If you open up your new IRA at a bank or an online broker, you are limiting yourself to the products they offer. Typically, you can only invest in “traditional” investments such as stocks, bonds and mutual funds. However, when opening a Self-Directed IRA with IRA Financial, you aren’t limited in what you are allowed to invest in. You can invest in anything from real estate, tax liens and precious metals to cryptos, businesses and hard money loans. This is in addition to traditional investments. Even if you’re not ready for alternative investments, opening an IRA with IRA Financial makes sense since the option will always be there.

Summary

In conclusion, you can still save on 2018 taxes by opening and contributing to an IRA. If you’ve never put aside money for retirement, now is the perfect opportunity to start. As we like to say, the sooner you start, the better off you will be! Don’t pass up the chance to not only start saving for your retirement, but cut your tax bill while you’re at it.

In the coming weeks leading up to the April 15 Tax Filing Deadline, we’ll be doing more posts about retirement and taxes. Our next post will detail how you can utilize a 401(k) loan to pay your tax bill. If you have any questions about these or other topics, please contact us @ 800.472.0646 today!

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