Now that tax season is well underway, millions of Americans are no doubt rushing around to gather paperwork and meet with their accountants to navigate the often complex process of filing a return. Of course, your goal in doing taxes should be to save as much money as possible by paying the IRS as little as possible. And while there are various tax deductions and credits available to filers, you may not be eligible for many of them.
For example, you can deduct the cost of your mortgage interest and property taxes (up to a certain point) on your tax return. But if you're not a homeowner, that doesn't help you. You can also claim a tax credit for each child in your household under age 17, as well as a credit to offset what you spend on child care. But if you don't have kids, that won't do you any good. And then there's the very valuable Earned Income Tax Credit, which can be a huge money-saver -- but that's only applicable if you're a low-income household.
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On the other hand, here's one extremely lucrative tax break that doesn't require you to own property, have kids, or be a low earner: traditional IRA contributions. And if you haven't yet funded your 2019 IRA, the good news is that it's not too late to pump some money into that account and lower your tax burden in the process.
How traditional IRA contributions work
IRAs come in two main varieties: traditional and Roth (there are other IRA types out there, but they're reserved for the self-employed). With a traditional IRA, your contributions are tax-free, but withdrawals are taxed in retirement. With a Roth IRA, you don't get an immediate tax break on your contributions, but your withdrawals are tax-free later on.
There are plenty of good reasons to keep your retirement savings in a Roth IRA. But if you're looking for a way to lower your taxes right now, a traditional IRA is the way to go.
How much savings might you reap? The annual contribution limit for IRAs in 2019 is $6,000 for workers under 50, and $7,000 for those 50 and over. Now, let's imagine you're 40 years and that based on your income, you fall into the 24% tax bracket. By maxing out your IRA at $6,000, you'll automatically shave $1,440 off your 2019 tax bill. Clearly, that's a huge amount of savings.
At the same time, by making that contribution, you'll have the option to grow wealth for retirement. Imagine you make that single $6,000 contribution, invest it at an average annual 7% return (which is more than doable with a stock-focused portfolio), and leave it alone for 30 years. In that time, it will grow to almost $45,700.
You still have time to fund that IRA
If you're worried that you've missed the boat on putting money into last year's IRA, fear not: You have until this year's April 15 tax-filing deadline to make that contribution. Therefore, if you've already started doing your taxes and the numbers aren't working out in your favor (meaning, you owe the IRS), it pays to see what a last-minute traditional IRA contribution could do for you. It could be an easy, effective means of reducing last year's tax burden while setting yourself up for a more financially secure future.
