Give Your Retirement Savings a Boost with These 10 Strategies For Maximizing Your IRA
As most of us lament the near extinction of the traditional pension income, planning for our future financial security in retirement has never been more important. There are some creative ways to give your retirement income a boost while you’re still bringing home a paycheck, and enjoy some tax breaks in the process.
Traditional IRAs can help you save money on your taxes while you build your nest egg. IRAs allow individuals to defer paying income tax on money they’ve set aside for retirement. The April 18, 2017, contribution deadline buys you extra time to contribute to your IRA, (unlike 401(k)s that required contributions be in by the end of the 2016 calendar year). The April deadline for Traditional IRA contributions will qualify you for a tax deduction on your 2016 return. And, since IRAs aren’t tethered to your job, you can maintain the same retirement account throughout your career. There are plenty of creative strategies for maximizing your retirement savings. Here’s 10 of them:
- Maximize the tax deduction
The IRS says you can defer paying income tax on up to $5,500 that you contribute to a traditional IRA. The dollar value of this tax deduction depends on your income tax rate and ranges from $825 for employees paying a 15 percent income tax rate to $1,925 for high earners in the 35 percent tax bracket. Income tax won’t be due on this money until you withdraw it from the account. - Make catch-up contributions.
Workers age 50 and older can save more money in an IRA than their younger counterparts. After 50, you’re eligible to contribute an additional $1,000 to your Traditional or Roth IRA, for a total tax-deductible contribution of $6,500 on your 2016 return. - Meet the contribution deadline.
IRA contributions are due by the tax filing deadline, which for 2016 is April 18, 2017. While preparing your tax return, plug in an IRA contribution to see how much it reduces the tax you owe or boosts your refund. Remember, if you make a contribution in January, February, March or April, you will need to specify on your return whether you want it to be applied to your 2016 or 2017 tax return. - Married couples can contribute in each spouse’s name.
Married couples can double their tax deduction by maxing out IRA contributions in each spouse’s name. That means if only one spouse works, the working spouse can also contribute to an IRA account in the nonworking spouse’s name. Your combined contributions to both IRAs can be as much as $11,000 if you’re both under age 50, $12,000 if one spouse is 50 or older and $13,000 if you’re both at least 50. - Claim the saver’s credit
Low and moderate income workers who save for retirement are eligible to claim the saver’s tax credit in addition to the tax deduction for their IRA contribution. If your adjusted gross income is below $31,000 as an individual or $62,000 as a couple in 2017, you may be eligible for a tax credit worth between 10 and 50 percent of the amount you contribute to an IRA—up to $2,000 for individuals and $4,000 for couples. - Directly deposit your tax refund
You may want to consider directly depositing part or all of your tax refund into an IRA. You can file a tax return claiming a traditional IRA contribution before the money is actually in the account as long as you make the deposit by the due date of your tax return. If you file early enough, you can use your tax refund to make an IRA contribution you already claimed on your tax return. - Make sure you qualify.
In order to save in an IRA, individuals must have earned income and be younger than age 70½. Workers whose employer does not provide a 401(k) plan or similar type of retirement savings plan can make tax-deductible contributions to an IRA regardless of their income level. However, the tax deduction for IRA deposits is phased out for those who are eligible for a 401(k) plan and have a modified adjusted gross income between $61,000 and $71,000 for individuals and $98,000 to $118,000 for couples in 2016. When only one spouse has a 401(k) account, the tax deduction is phased out when the couple’s income reaches between $184,000 and $194,000 in 2016. - Minimize fees
IRAs have more investment options than 401(k) plans, which provides you with an opportunity to shop around for the lowest-cost funds that meet your investment needs. There’s also a 10 percent early withdrawal penalty if you take money out of your IRA account before age 59½ unless you meet specific circumstances or use the money for one of a few specific purposes that qualify as exceptions to the penalty rule. - Consider a Roth IRA
While you don’t get an immediate tax break for the money you contribute to a Roth IRA, your money grows without being taxed each year and withdrawals after age 59½ from accounts at least 5 years old are tax-free. Long-term Roth account owners can avoid paying income taxes on decades of investment growth. - Check out the myRA.
The myRA has only one investment option, a U.S. Treasury retirement savings bond. The myRA carries no risk of losing money, making it easy to set up and manage. You can have your contribution withheld from your paychecks by your employer, directly deposited from a checking or savings account or use your tax refund to fund the account. However, once you accumulate $15,000 or the account turns 30 years old, you will be required to transfer your balance to a private sector Roth IRA.
Employing even a few of these strategies can significantly boost your retirement income.