Let us face it, no one loves filing taxes unless you are an accountant. The good news is that you can avoid the hassle and make the process seamless and tolerable. All you have to do is to maximize your pre-tax IRA contributions.
Tax-Efficient Contributions
According to IRA rules, families and individuals can make their 2020 contributions by Tax Day on April 15, 2021. They can also make their 2020 contributions by the last day of the extension if applicable. C-Corporations and fiscal year taxpayers are expected to file before March 15, 2020, plus extensions.
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Dollar limits exist according to your status. To help you understand, families have different dollar limits from individuals. The good news is that IRA contributions lower the taxable income. Reduced taxable income means that you will get a considerable tax break.
Families and individuals who have already filed 2020 contributions can still enjoy these huge benefits by filing an amended return.
Essentials You Should Consider
Roth and Traditional IRAs
The first thing you should remember is that you can contribute to both Roth and traditional IRAs. The maximum allowed for 2020 individuals less than 50 years of age is $6,000, while those over 50 years of age can contribute up to $7,000.
Individuals who are more than 50 years of age pay more to increase their savings since they are about to retire. Remember that your contributions cannot exceed these maximums if you contribute to both Roth and traditional IRA.
In addition to that, IRA has introduced various limits based on the custodian’s participation and income. While Roth IRA contributions are taxed, the withdrawals are tax-free.
Understanding the Differences Between Traditional and Roth IRA
Although these tax-advantaged Individual Retirement Accounts allow individuals and families to save for retirement, the reality is that they differ in some vital aspects. Traditional IRA was established in 1974, while Roth IRA was started in 1997. When choosing your preferred IRA, it would be best to understand the differences between the two.
First, contributing to your traditional IRA will lower your taxable income each tax year. On the other hand, Roth IRAs do not reduce the taxable income. However, withdrawals are tax-free.
Besides, anyone who earns an income can contribute to a traditional IRA. On the contrary, you have to meet the income-eligibility restrictions to contribute to Roth IRAs.
Why Should You Contribute to Your IRA Before the Tax Deadline?
True, you have until April to make your IRA contributions. However, reputable financial experts believe it is a good idea to contribute to your IRA as early as possible. When you max out your IRA contribution, you will be giving yourself more chance to enjoy huge tax benefits.
Keep reading to discover the top reasons why you should contribute to your IRA before the tax deadline:
- One of the first reasons you should make early contributions to your IRA is to lower your taxable income. When your max out your IRA during the first few months of the year, you will be giving your money about 15 additional months to earn considerable tax deductions. This will add up over time.
- Apart from lowering the taxable income, contributing the maximum amount will go a long way towards safeguarding your financial future. Your money will be invested to earn more money to safeguard both individuals and families. What is more, Roth IRAs now have tax-free withdrawals. This allows you to save for the future. For instance, you can save for college or a considerable expense.
- Contributing to your IRA before tax day is the best approach for low to moderate-income households. Reducing your taxable income gives you access to various tax credit programs. For instance, these households might qualify for the Child and Dependent Care Credit if they make early contributions. The Saver’s Tax Credit and Health Insurance Premium Tax Credit is available to low and medium-income households that contribute to their IRAs early.
The Takeaway
It is advisable to let your hard-earned money work for you instead of letting the Internal Revenue Service get to it. Maximizing your IRA contributions is the best way of letting your money work for you. Do you want to learn more about IRA contributions? Talk to a reputable and successful IRA specialist today.
