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

Learn the answer to "How does an IRA work as a tax deduction?"

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 2017 calendar year; it can be made up until the filing deadline in April 2018. Keep reading to find out how to use your IRA as a last-minute tax deduction.

How to Use Your IRA for Tax Deductions

Contributing to an IRA is a helpful last-minute option when you’re trying to minimize your taxable income at tax-filing 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 which tax year to make the contributions for. 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

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 including paying college expenses for you, your spouse, children or grandchildren, making a deposit on a home purchase, or paying for medical expenses. For the first-time homebuyer, for example, a Roth IRA can be a great savings tool.

Learn: Roth IRA Rules You Need to Know

How Does an 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 2017 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.

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 2017 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.