How to Use Your IRA as a Last-Minute Tax Deduction

This tip helps your taxes and your retirement savings. Win-win.

An IRA contribution could provide some last-minute tax relief when it’s time to file your tax return. Contributions to a traditional individual retirement account or a simplified employee pension IRA are tax deductible, and your IRA contribution doesn’t have to be made during the 2018 calendar year; it can be made up until the filing deadline on April 15, 2019 and still count towards your 2018 taxes. To make the most of your money, understand the steps for using your IRA contribution as a last-minute tax deduction.

How to Use Your IRA for Tax Deductions

Contributing to an IRA account is a helpful last-minute option when you’re trying to minimize your taxable income at tax time. You can use your IRA as a last-minute deduction by contributing to your account on or by April 15. When you open or log into your IRA account, there is usually an option to choose for which tax year to make the contributions. Choose the year for which you’re filing your tax return, as long as the tax deadline hasn’t passed.

You can also contribute to your IRA at any time during the year, as long as you don’t invest more than the maximum amount allowed.

Don’t Miss: 10 Tax Loopholes That Could Save You Thousands

IRA Deduction Limits

The amount you can deduct depends on your tax filing status, adjusted gross income (AGI) and whether or not you also are covered by a retirement plan at work. Use the tables below to determine your deduction amount based on the IRA income limits.

2019 Limitations on Deduction for Traditional IRAs if Covered by Retirement Plan at Work
Filing StatusModified AGIDeduction Amount
Single or head of household$64,000 or lessFull deduction up to the contribution limit
More than $64,000 but less than $74,000Partial deduction
$74,000 or moreNo deduction
Married filing jointly or qualifying widow(er)$103,000 or lessFull deduction up to the contribution limit
More than $103,000 but less than $123,000Partial deduction
$123,000 or moreNo deduction
Married filing separatelyLess than $10,000Partial deduction
$10,000 or moreNo deduction

 

2019 Limitations on Deduction for Traditional IRAs if Not Covered by Retirement Plan at Work
Filing StatusModified AGIDeduction Amount
Single, head of household or qualifying widow(er)Any amountFull deduction up to the contribution limit
Married filing jointly or separately with a spouse who is not covered by a plan at workAny amountFull deduction up to the contribution limit
Married filing jointly with a spouse who is covered by a plan at work$193,000 or lessFull deduction up to the contribution limit
More than $193,000 but less than $203,000Partial deduction
$203,000 or moreNo deduction
Married filing separately with a spouse who is covered by a plan at workLess than $10,000Partial deduction
$10,000 or moreNo deduction

Roth IRA Rules and Benefits

A Roth IRA is a retirement savings account that you fund with after-tax dollars. You receive no upfront tax break — except possibly the Saver’s Credit, if you qualify — but when you access the funds at retirement, the withdrawals won’t be taxed. Roth IRAs are different from traditional IRAs because they have the flexibility to access funds penalty-free in a few circumstances that include paying college expenses for you, your spouse, children or grandchildren, making a deposit on a home purchase or paying for medical expenses. With a Roth IRA, you can always withdraw your contributions, but not earnings, tax- and penalty-free. For the first-time homebuyer, for example, a Roth IRA can be a great savings tool. This is why many consider a Roth IRA to be a great short-term investment as well.

See: The Best Roth IRA Accounts

How Does a Traditional IRA Work?

The goal of all types of IRA contributions — and 401k accounts, too — is to leave that money untouched year after year. With a traditional IRA, you can initially avoid paying taxes on the money you put into the plan. For the 2018 tax year, the traditional IRA contribution limit is $5,500 if you are under age 50, and $6,500 if you are over age 50. For 2019, the limits have increased to $6,000 if you are under age 50, and $7,000 if you are over age 50.

You can open an IRA with your bank or credit union, or with a brokerage, and you can start investing in an IRA with less than $500. Considering the two biggest factors for maximizing the power of compound interest are the interest rate and the length of time your money earns interest, you should start your contribution now — even if it’s only with a little bit of money — rather than waiting. If you are paying down high-interest credit card debt, consult with a financial advisor for your best course of action to save money and pay down debt as quickly as possible.

Start Saving With a SEP IRA, Roth IRA, Traditional IRA or 401k Account

Before you start calculating your IRA contributions, consider any 401k options. If your company offers a 401k plan, you’ll want to use that. You should maximize your employer’s match — these funds are free. Understand your company’s vesting schedule, if there is one. Although some plans allow you to keep funds immediately, less generous plans require you to be at a company as long as six years before being fully vested in employer contributions. Don’t think of the matching funds as yours until the funds have fully vested.

IRA vs. 401k: Tips for Choosing the Best Retirement Plan

Even if you didn’t save much in 2018 in a 401k or other account, you can change the future and do better by making smart investment decisions and saving diligently. Remember, there is no minimum contribution to open an IRA, so you can get started with any small deposit. Online IRAs such as E-Trade, Betterment and Ally Invest will allow you to open an account with $0. Consider making your IRA contribution and find one of the best IRAs today.

Click through to read more about commonly missed tax deductions you might be able to take.

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Gabrielle Olya contributed to the reporting for this article.

About the Author

Valerie Ashton is a writer based in Southern California, specializing in real estate, finance and aviation topics. Valerie is a commercial pilot, California real estate broker, certified paralegal and Notary Public. Her work has appeared in numerous publications in print and online.