If you haven’t filed your 2021 tax return yet, you may still be able to lower your tax bill by making a contribution to an IRA.
Eligible taxpayers can make deductible contributions to a traditional IRA at any time before the filing date on April 18, 2022. Making a deductible contribution now could allow you to save on your 2021 return.
Eligibility requirements
Generally speaking, taxpayers are eligible to make a deductible contribution to a traditional IRA as long as:
- They (or their spouse) aren’t an active participant in an employer-sponsored retirement plan, OR
- They (or their spouse) are an active participant in an employer plan, but their modified adjusted gross income (AGI) is below specific levels that change from year-to-year by filing status.
For 2021, deductible IRA contribution phases out over $105,000 to $125,000 of modified AGI for joint tax return filers who are covered by an employer plan. This phaseout range is:
- $66,000 to $76,000 for taxpayers who are single or a head of household
- $0 to $10,000 for those who are married and filing separately
- $198,000 to $208,000 for taxpayers aren’t active participants in an employer-sponsored retirement plan but have spouses who are
Although a deductible contribution to a standard IRA will reduce your tax bill for 2021 and earnings within the IRA will be tax deferred, every dollar you take out will be taxed in full. In addition, any amount taken out is subject to a 10% penalty for taxpayers under the age of 59½, unless certain exceptions apply to you.
Even if you don’t work, you may still be able to lessen your tax bill by making a deductible IRA contribution. Generally speaking, taxpayers must have wages or other earned income in order to make deductible contributions to an IRA. However, an exception may apply if your spouse is the primary earner of the home. In this case, you may be able to make a deduction to a spousal IRA.
It’s worth noting that most IRAs are called “traditional IRAs” to differentiate them from Roth IRAs.
Although you can still contribute to a Roth IRA before April 18, contributions to a Roth IRA aren’t deductible. However, you can make tax-free withdrawals from a Roth IRA as long as you’re age 59½ or older and the account has been open at least five years. (To contribute to a Roth IRA, you will also need to be under certain income limits.)
Contribution Limits
For 2021, eligible taxpayers may make a deductible contribution of up to $6,000 to a traditional IRA (if you’re age 50 or older, this limit is $7,000).
Small business owners may also set up and make contributions to a Simplified Employee Pension (SEP) until the date their return is due, including extensions. The maximum contribution for SEPs is $58,000 for 2021.
If you have questions or need more information about IRAs or SEPs, contact us. We can guide you through your savings options as you consider your tax bill.