As we step toward the new year, thoughts about tax season may be on your mind. The possibility of owing money can be overwhelming, but there are strategic ways to alleviate your 2023 tax bill. Let's dive into how you can proactively start saving.
To make the most of your 2023 tax filings, you may want to consider contributing to a *Traditional IRA. With this option, you'll be able to contribute up to $6,500, or $7,500 if you're 50 or older. This can help you reduce your taxable income while saving for retirement.
Let's break down the different IRAs:
Traditional IRA
The Traditional IRA appears as the preferred retirement plan for contribution, immediately deducting from your taxable income. These investment accounts mature tax-free until you start withdrawals at the age of 59 ½.
But how do you quantify your potential savings? Estimate by multiplying your federal marginal tax rate by the contribution amount. For instance, with a 22% federal tax rate and a maximum $6,500 contribution to your Traditional IRA, you could save approximately $1,430 in taxes.
SEP IRA
Tailored for self-employed individuals and small business owners, SEP IRAs offer a comparable structure to traditional IRAs. The advantage lies in the ability to contribute nearly ten times the amount allowed by a traditional IRA. From 2023 onwards, the IRS will allow contributions of up to 25% of compensations or $66,000, whichever amount is lower. This is an increase compared to contributions allowed in previous years.
One of the benefits is that you can make contributions until the end of the tax filing season. This is especially useful for people who don't have a steady income throughout the year.
Roth IRA
Ideal for younger investors with lower incomes, Roth IRAs serve as an excellent tool for financial planning. It's crucial to note that Roth IRAs are not tax-deductible like their traditional counterparts, as they involve allocating after-tax funds. However, what makes it attractive is that the money you earn in these accounts doesn't get taxed after you start making withdrawals at 59 ½.
By strategically choosing the right IRA plan for your financial situation, you can transform your tax season experience and pave the way for a more secure financial future. Whether it's the immediate deduction of a Traditional IRA, the enhanced contribution potential of a SEP IRA, or the tax-free growth of a Roth IRA, these options offer valuable avenues to save on taxes and bolster your overall financial well-being.
If you are interested in learning more about financial planning, don't hesitate to reach out to me at letstalk@linkwealthstrategies.com.
*Please note that the contribution deadline is April 18, 2024.
Sources: https://forbes.com/advisor/retirement/last-minute-ira-contributions/ https://www.irs.gov/retirement-plans/plan-participant-employee/2022-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-not-covered-by-a-retirement-plan-at-work https://money.com/tax-brackets/?ref=/lower-2022-taxes-ira-contribution-deadline/ https://www.forbes.com/advisor/retirement/sep-ira/ https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps#:~:text=How%20much%20can%20I%20contribute,living%20adjustments%20for%20later%20years)