If you’ve been neglecting your IRA, listen up.
Most of us know that contributions to individual retirement accounts, or IRAs, are tax deductible. But did you know it’s not too late to make a contribution for your 2008 tax return?
In fact, you have until April 15 to make your move. Unlike other deductions, which are calculated from Jan. 1 through Dec. 31, a contribution to your IRA will count as long as you make it before tax day is over. And this year’s deductible amounts could really make a difference in your bottom line. If you’re under the age of 50, you can deduct up to $5,000. How much savings is that? If your average tax rate is 20%, you could save up to $1,000 in taxes by making your contribution today. Boomers, you’re even luckier. If you are 50 or older, you can deduct up to $6,000.
The IRA contribution deduction is better than most other deductions because it not only lowers your federal income tax bill, but it also takes a bite out of most state tax bills. That’s because the deduction is used to calculate “adjusted gross income,” which is the starting point for most state tax calculations. If your starting point is lower, then your ending point will be lower too. If your state bases its income tax calculation on your federal adjusted gross income, (and most states do) your IRA contribution could help you not once, but twice.
There are, of course, some limitations on the deduction. The higher your income is, the smaller your deduction will be. If you file jointly with your spouse and had income of more than $85,000 last year, your deduction will be reduced or eliminated. And if you’re single, your deduction will be reduced or eliminated if your income was more than $53,000 last year. Your deduction may also be limited if you participate in a retirement savings plan through your employer. Finally, if you have a Roth IRA, you’re in luck when it comes to retirement, but today’s deduction is not for you.
For a wealth of additional information on the tax benefits of contributing to your retirement plan, take a look at IRS Publication 590 (pdf). And if you haven’t made your 2008 IRA contribution yet, do it now, before it’s too late!
Be sure to check out our complete archive of Daily Deductions!