While most deductions require that you have your ducks in a row by the end of the tax year, there is one last-minute deduction that you can use up until April 15th: the IRA contribution deduction.
IRA stands for Individual Retirement Account, and it was specifically designed to provide tax advantages for retirement savings.
You can contribute up to $5,500 tax deductible dollars to your IRA every year ($6,500 if you’re over 50). It’s an awesome and easy deduction because it doesn’t require you to itemize anything. But what many people don’t realize is that you can contribute that money up until the filing deadline.
The savings can be huge: for someone in the 25% tax bracket, contributing the full amount to an IRA can lower your tax liability by $1,375. Now that’s walking around money!
We’ll walk you through the process of contributing your cold, hard cash to your IRA so that you can get some cold, hard cash back from the IRS.
Some fun legal technicalities before you get started
The contribution limit of $5,500 has a caveat: if you earned less than $5,500, whatever you earned is the limit of what you can contribute. For example, if you’re a teenager and you earned $1,000 working at McDonald’s last summer, the highest amount you can contribute to an IRA is $1,000. Your grandma gave you $4,500 as a gift? Tough: you’re still stuck at the $1,000 limit.
The IRS will tax you 6% on any excess amount you have in your IRA until the excess amount is withdrawn.
Also note that only traditional IRA contributions are tax deductible. You may have heard of Roth IRAs. Roth IRAs work differently: instead of being tax deductible upfront, you pay taxes now and then get tax-free withdrawals when you retire.
If you’re covered by a retirement plan at work, you may not be able to claim a deduction on an IRA. You can use this table from the IRS to see if you qualify for a full or partial deduction. If your filing status is single, you can’t take a deduction if your modified AGI is $70,000 or more. If your filing status is married filing jointly, you can’t take a deduction if your modified AGI is $116,000 or more. (These numbers change every year, so check back next year for info on 2015’s tax code.)
How to contribute to your IRA
If you already have an IRA, it’s as easy as logging in to your account and making a transfer. Some banks or brokerages might have an earlier cutoff than the IRS. Check with whoever manages your account to make sure you contribute before their cutoff.
When you transfer your money, you should be given the option to either contribute to your 2014 IRA or your 2015 IRA. If you want to deduct money for your 2014 taxes, make sure you choose 2014 IRA. Otherwise, you won’t be able to deduct until next April.
If you’re sending in a contribution by check, you can write “2014 contribution” in the memo line.
In both cases, follow up with your account manager to confirm that the money was credited to your 2014 IRA.
If you don’t have an IRA account, you can do some shopping to find one that fits your tolerance for risk. Many banks have IRAs that act like CDs and grow at a specified interest rate. You can also open an IRA at a brokerage that will invest your money in the stock market.
You may have heard of automated brokerages like Betterment or Wealthfront. Both of these automated brokerages offer IRAs and promise to get you the best return. Read more about how automated brokerages work and see if they fit into your retirement plans.
Did you save cash this year?
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