Think 65 Is the Best Age for Social Security? Here’s Why You Should Rethink That Plan
You might regret claiming benefits at age 65.
New Year’s Day 2022 has come and gone, but you might still have a chance of lowering your 2021 tax bill. Although most tax-related items for 2021 locked in place when the calendar year turned, you still might be able to use a traditional individual retirement account (IRA) to lower your 2021 tax bill, well into 2022.
If you’re eligible to contribute and to deduct your contributions into a traditional IRA, then the IRS may still let you lower your 2021 tax bill before you file your taxes by April 15. The opportunity isn’t open to all people, however, and in some cases, you may be able to contribute but not deduct your contribution. Still, if you can make it work, then it could provide a great chance to both save for your future and reduce what you need to pay to Uncle Sam today.
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Keys to making it work
If you had earned income from a job or contractor-type income in 2021, you can contribute to a traditional IRA until April 15, 2022. The maximum contribution you can make is $6,000 if you hadn’t reached age 50 by the end of 2021, or $7,000 if you reached age 50. In either case, you can’t contribute more than your taxable compensation for the year. If you’re married, both spouses are eligible to contribute to a traditional IRA, even if only one had qualifying income.
Once money is in your traditional IRA, it can grow tax deferred until you start withdrawing it in retirement. Once you do withdraw your money, any growth above your contribution basis is taxed as ordinary income. If you can’t deduct your contributions, the amount you contribute is considered your contribution basis, but if you can deduct them, then your contribution basis is $0.
And that brings up the key to lowering your 2021 taxes even today: the ability to deduct your contribution to your traditional IRA for tax year 2021. Whether or not you can deduct it depends on a small handful of key factors, including:
Your income level.
Your marital status (and if you’re married, how you file your taxes).
Whether or not you (or your spouse) are covered by a retirement plan at work.
Here are the general rules:
If neither you nor your spouse (if you have one) are covered by a retirement plan at work, you can always deduct your IRA contributions for the year, no matter what your income level.
If either you or your spouse are covered by a retirement plan at work and you file as married filing separately, your deductions start to phase out if you have any income, unless you didn’t live together at all during the year.
If you are covered by a retirement plan at work and file as single or head of household, your ability to deduct your contribution starts to phase out once your income passes $66,000.
If you are covered by a retirement plan at work and are married filing jointly, your ability to deduct your contribution starts to phase out once your income passes $105,000.
If you are not covered by a retirement plan at work, but your spouse is, and you are married filing jointly, your ability to deduct your contribution starts to phase out once your income passes $198,000.
Note that if you are married filing separately and you and your spouse did not live together at all during the year, your ability to deduct your traditional IRA contribution is based on the “single” phase out levels.
The impact could be significant, both today and in the future
If you’re married and both you and your spouse turned 50 in or before 2021, the maximum the two of you could potentially deduct is based on a contribution of $14,000. That could mean a deduction worth thousands of dollars off your Federal income taxes — and potentially a state tax deduction, too.
In addition to the tax deduction, the money you sock away today will play a part in building the nest egg that funds your retirement plan. That makes the benefits of funding your traditional IRA all that much sweeter.
The thing is, though, that the opportunity to fund your traditional IRA and deduct it from your 2021 taxes slams shut on April 15, 2022. So if you’re eligible, make a plan and have it happen soon. Because once that window closes, it’s gone forever. Get started now, and both your upcoming tax bill and your future will very likely thank you for it.
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