Maximize Your Tax Benefits: Act Now Before the IRA Contribution Deadline

Tax Day Approaches – Deadline for IRA Contributions

As the annual tax deadline approaches in April, many are focused on gathering the previous year’s information to begin tax preparation.  There is often little decision making in this process as most tax return items are locked in after December 31^st.  However, there is one lever that can be pulled to adjust taxes due right up until the tax deadline which falls on Monday April 15^th, 2024 this year.  Subject to certain limits, there is still a bit of time to make IRA, Roth IRA, or SEP contributions.

This allows for opportunities to lower taxable income or to make post tax contributions to Roth plans after all taxable income items for the year are known.  There are limits, however, to the amount you can contribute, as well as the deductibility of those contributions which may affect the potential tax benefit of additions to your IRA.

Contribution Limits

IRS code allows for contributions to a regular IRA or Roth IRA each year, so long as you have earned income such as from wages or self-employment income equal to or greater than your contribution.  For 2023 taxes you can contribute up to $6,500 to a regular IRA and possibly lower your taxable income by the same amount.  If you are over age 50 you are eligible to contribute an additional $1,000 for a total of $7,500.  In 2024 those limits are set to increase to $7,000 for those under 50, and $8,000 total for those over 50.  If you prefer to contribute to a Roth IRA instead, the same limits will apply, but contributions would not be tax deductible.

SEP IRA plans have higher contribution limits, with a maximum contribution of 25% of compensation or $66,000 (whichever is lower) in 2023. In 2024 the limit increases to the lower of 25% of compensation or $69,000.  While in certain cases contributions to both a SEP IRA and to a regular or Roth IRA may be allowed, for most the SEP contributions will significantly reduce or eliminate the ability to contribute to regular or Roth IRA plans.  SEP contributions may be made up to the tax filing deadline and still be applied to the previous tax year.

Tax deductible IRA contributions

While contributions to Roth IRAs are not tax deductible, contributions to regular IRAs may result in an offset to income subject to certain thresholds.  These thresholds are based on your modified adjusted gross income (MAGI) for the year.  To determine your MAGI, you must first calculate your adjusted gross income (AGI).  AGI is calculated by determining your total income from all sources, then subtracting all qualified deductions.  MAGI is then calculated by adding back certain deductions if taken such as rental losses, tuition & fees deductions, and IRA contribution deductions.

Regardless of your income, you are allowed the full deduction if both you and your spouse are not covered by a retirement plan through work. Otherwise, for taxpayers filing single or head of household all regular IRA contributions are deductible in 2023 if MAGI is below $73,000, and no deduction is available if MAGI exceeds $83,000.  In between those limits a partial deduction is available.  If you are married filing jointly and covered by a work plan you can get a full deduction for 2023 if MAGI is below $116,000 and deductions phase out completely at $143,000. If you are married filing jointly and you are not covered by a work plan, but your spouse is, you can get a full deduction if MAGI is below $218,000 and deductions phase out completely at $230,000.

Roth IRA Contribution Limits

While contributions to Roth IRAs are not tax deductible, there are income limits based on MAGI which determine your eligibility to contribute directly to a Roth IRA.  In 2023, if you are filing single or head of household your MAGI must be below $138,000 to contribute the maximum allowed ($6,500 in 2023 or $7,500 if over 50).  From there contribution limits are reduced until no contribution is allowed at MAGI of $153,000 or more.  If married filing jointly the maximum contribution is allowed at MAGI below $218,000, and no contribution is allowed if MAGI is $228,000 or more.

Conclusion

There is a window of time between December 31^st and the tax filing deadline in April that may allow you to make tax deductible or Roth IRA contributions for the previous tax year.  While the current IRS limits are outlined above, we strongly recommend working with your accountant or tax professional to determine if making contributions for the prior tax year might be beneficial in your situation.  Also, bear in mind that processing times for contributions can vary depending on where your IRA is housed.  In some years custodian processing times can be delayed so it is always a good idea to begin the process sooner rather than later.

Please let us know if you have any questions.  If you have determined that making contributions this year would be beneficial, your Summitry advisor would be happy to aid in coordinating those contributions.

If you’re seeking comprehensive wealth management services tailored to address the unique financial considerations of living in the dynamic Bay Area, look no further. Our team at Summitry is dedicated to guiding you towards financial peace of mind and security in this thriving region. Whether you’re planning for retirement, navigating investment opportunities, or strategizing for your financial future, we’re here to assist you every step of the way. Contact us today to learn more about how our personalized approach to wealth management can help you reach new heights and achieve your financial goals.

This article is for informational purposes only. Summitry, LLC does not provide tax advice.