Tax day is just around the corner -- but that doesn't mean the opportunity to save on your tax bill is over. In fact, if you've run the numbers and you find that you'll owe the IRS this year, there's one huge tax break you still have time to claim if you act fast: the tax break for retirement account contributions.
This tax break can save you a bundle, while also helping ensure you won't have to depend solely on Social Security checks during your golden years. But you need to act quickly to claim the discount on your 2018 taxes before you lose it forever.
You can still claim a tax break for retirement contributions
When saving for retirement, there are several different accounts to which you can make tax-advantaged contributions.
You can contribute to a 401(k) with pre-tax dollars by having the money withdrawn from your paycheck. You can make tax-deductible contributions to a traditional IRA by opening an account with a bank or broker. Be aware that if you or your spouse have access to a workplace retirement plan, your tax-deductible IRA contributions may be limited, depending on your household income.
For the 2018 tax year, IRA and 401(k) contributions can be made until April 15, 2019. Or, if you submit a timely request for a tax extension, which gives you until Oct. 15, 2019 to file your returns, then you can make contributions until the extended deadline -- but only if you're making contributions to a SEP IRA.
When you open your own IRA, specify that the contributions you're making are for the 2018 tax year. If you have a 401(k) at work, your plan likely won't allow you to make these contributions -- talking to your human resources department is the best way to find out. If you have a solo 401(k), you can still contribute for the 2018 tax year.
How much could this tax break save you?
Contributing to a 401(k) or IRA can provide substantial savings on your tax bill.
The contribution limit for a 401(k) in 2018 was $18,500 for employees, with an extra $6,000 catch-up contribution for folks age 50 or older. Employer contributions do not count toward this limit. The contribution limit for an IRA was $5,500, and those 50 and older are allowed to save another $1,000 in catch-up contributions.
Since 401(k) contributions are typically diverted from your paychecks, it's probably too late to max out your 401(k) if it's a workplace plan. However, those who are self-employed and have a solo 401(k) could potentially still make contributions through April 15, or through Oct. 15 if they are filing for a tax extension. But anyone who is eligible can make a lump-sum tax-deductible IRA contribution up to the limit, by April 15 or Oct. 15, and still claim the full permitted deduction.
If you're in the 22% tax bracket and you deduct your $5,500 contribution from your taxes, you would see tax savings of $1,210. And, if you could contribute $6,500, the savings would be even higher at $1,430. The higher your tax bracket and the more you contribute, the more savings you'll realize.
The best part: You don't have to itemize to claim this tax break. It reduces your taxable income even if you claim the standard deduction.
Contribute to your 401(k) or IRA ASAP to claim a big tax break
If you can still contribute to a 401(k) for 2018, or if you have an IRA you haven't maxed out, now is the time to get as much money as you can invested to save on your tax bill. Once tax day passes, you'll forever miss your chance to claim these valuable tax breaks that help you build a secure nest egg for your future.