There’s Still Time to Get a Tax Boost by Contributing to an IRA


You can make a contribution for the 2018 tax year until the date you file your taxes—and if you didn’t, you probably should.

There’s Still Time to Get a Tax Boost by Contributing to an IRA

Tax time is often a reminder that we could have done things a little differently the prior year. When it comes to retirement savings, the Internal Revenue Service gives you something of a do-over: You can make a contribution for the 2018 tax year until the date you file your taxes—April 15—and if you didn’t, you probably should.

If you want to make a contribution, you may face a major decision—whether to put your money in a traditional IRA or a Roth IRA. A traditional IRA gives you a tax deduction when you make your contribution, and then all your withdrawals are taxed as income. With a Roth IRA, you contribute after-tax money, and all your withdrawals are tax-free.

The rule of thumb is that you want traditional IRAs if your tax bracket now is higher than it will be at retirement, and you want Roth IRAs if your tax rate now is lower than it will be at retirement.

Given the uncertainties in these calculations, many experts recommend that you play it safe by establishing traditional and Roth IRAs. “It’s a hedge that allows you to manage your tax brackets on both the deduction side and when taking distributions.

At a macro level, the federal government faces a huge budget deficit, so taxes may increase for everyone in coming years. Talk has percolated in Congress in recent years about limiting the benefits of retirement savings plans.

And at a micro level, it’s difficult to know what your income will be and what deductions you’ll be able to use in retirement. “I can’t tell you how many people I’ve seen whose income didn’t go down [as expected in retirement], but their deductions did.”

For many of you, the choice between Roth and traditional, tax-deductible IRAs is a non-issue. Your income is too high to allow for contributions to either vehicle.

For a traditional IRA, if you’re single and your modified adjusted gross income is over $73,000, you don’t qualify for a traditional IRA. For a Roth IRA, the limit is $137,000.

If you exceed those limits, you’re still eligible for a non-deductible IRA. While you don’t receive a tax deduction, any growth in the account—capital gains, dividends, etc.—is tax-free. And you can ultimately convert your non-deductible IRA into a Roth IRA—what’s known as a backdoor conversion.

Experts say the non-deductible IRA makes sense for those who are too wealthy for the deductible traditional and Roth IRAs. “It’s an excellent idea, especially if you’re younger,” says Richard Rampell, a principal at MBAF accounting firm in Palm Beach, Fla.

If someone puts money in to the vehicle during his/her 20s and 30s, there’s a lot of potential tax-free earnings gains for the IRA. For older people, it makes less sense, because they’ll have less opportunity for gains before they start withdrawing money.

As for the issue of Roth vs. traditional, Roth IRAs are more valuable as an estate planning tool. That’s because inherited IRAs keep their tax characteristics. So your heirs don’t have to pay taxes on withdrawals from Roth IRAs, but do have to pay taxes on withdrawals from traditional IRAs.

If after weighing all the relevant factors, you aren’t sure whether to contribute to a Roth or traditional IRA, you might tilt toward traditional. That’s because you can always convert from a traditional to a Roth later. “It’s year-by-year situation” for taxpayers, Olver says. Early in retirement, someone may have a low tax obligation and anticipate higher taxes down the road. That might dictate a conversion to a Roth IRA, he says.

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This Blog is not intended to render tax or legal advice. Before making any investment decision, seek proper professional advice.

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