You Can Still Make This Move to Lower Your 2018 Taxes

But time runs out soon.

Maurie Backman
Maurie Backman
Feb 9, 2019 at 11:16AM
Investment Planning

No matter how much you earn, it's always better to pay the IRS less tax than more. And there are several steps you can take to achieve that goal. You can read up on the different credits available to taxpayers, or run numbers to see whether itemizing on your return will pay off.

But if there's one strategy you really don't want to pass up this year, it's maxing out your traditional IRA. Doing so won't just help you save for retirement; it could also lower your tax burden significantly.

It's not too late to fund your IRA

Anyone who has earned income from a job is eligible to contribute to an individual retirement account, or IRA. IRAs come in two main varieties -- the traditional and the Roth. Roth accounts offer a number of benefits, but they won't lower your taxes at present. If you fund a traditional IRA, though, the sum you contribute will be exempt from taxes.

Post-it note reading tax reduction needed


Now if you're thinking you missed the boat to contribute to an IRA for the 2018 tax year, here's some good news: You have until the April 15 tax filing deadline to fund that account. Even if you slacked off throughout 2018, you can still contribute up to $5,500 if you're under 50, or $6,500 if you're 50 or older.

Keep in mind that IRA limits have since gone up, so for the current year, you can contribute up to $6,000 if you're under 50, or $7,000 if you're 50 or older. But if you're allocating funds to last year's IRA, the former $5,500 and $6,500 limits are in play.

How much can your IRA contribution save you tax-wise? Let's imagine you're under 50 and max out your 2018 IRA at $5,500. If your effective tax rate is 25%, you'll save $1,375.

But that's not all -- you'll also get to invest that money for retirement and use it to fund your golden years. Imagine you're 30, you contribute $5,500 to your IRA, and you leave that money alone for a 40-year period. After four decades, you'll have grown that sum into $82,300, assuming your investments generate an average annual 7% return during that time (which is certainly doable if you load up on stocks).

How is that possible? The great thing about traditional IRAs is that your money, once invested, gets to grow on a tax-deferred basis. When you invest in a traditional brokerage account, you pay taxes on your gains year after year. With a traditional IRA, you don't pay taxes until the time comes to take withdrawals in retirement. As such, you get to continuously reinvest your gains to further fuel your account's growth.

Opening your IRA

If you don't have an IRA already, opening one is simple. You can either visit a local financial institution and set one up in person, or open one online. Just don't wait until the very last minute, because you want that account funded by April 15 to make sure your contribution counts for the 2018 tax year.