It’s a new year, and the book has closed on 2022. But, those still looking for a way to reduce their 2022 tax bill and accelerate their retirement savings have a planning opportunity available, which is to make an individual retirement account (IRA) contribution before the tax filing deadline of April 18, 2023.

Reduce Your Tax Bill

Unlike most other tax deductions, which must be recorded before the end of the calendar year, the IRS allows tax-deductible IRA contributions to be made up until the tax filing deadline. Those eligible can contribute up to $6,000 or $7,000 for those 50 or older (contributions limits increase to $6,500 and $7,500 for the 2023 tax year).

As you or your preparer work on your tax return, you can plug in an IRA contribution to see exactly how much your tax bill will decline. For eligible taxpayers, contributions to a traditional IRA can be deducted from your taxable income, resulting in immediate tax savings. For example, if you are in the 24 percent tax bracket, a $6,000 contribution will reduce your taxable income by the same amount, resulting in a tax savings of $1,140 ($6,000 x 24 percent).

Beware of IRA Income Limits

Anyone can contribute to an IRA, even if they participate in an employer-sponsored retirement plan. The issue is whether you’re eligible to deduct the full amount of your contribution or not.

If you and your spouse don’t have access to a workplace retirement plan, you can deduct the full amount of your traditional IRA contribution.

If you and your spouse have access to a workplace retirement plan, the deductibility of your contribution is phased out above certain income levels. For example, single filers may take the full deduction if their income is $68,000 or less. For incomes between $68,000 and $78,000, the deduction is phased out and unavailable for incomes of $78,000 or more. For married filers, the income threshold is $109,000 to $129,000. (IRA income thresholds are increased in 2023).

If only you or your spouse has access to a workplace retirement plan, the income limits increase to $204,000 to $214,000 for 2022.

Compare the Advantages of a Traditional and Roth IRA

While using an IRA tax deduction to reduce your tax bill is appealing, you may want to compare the advantages of a traditional IRA vs. a Roth IRA. If your taxable income places you in a lower tax bracket in 2022, contributing to a Roth IRA may make more sense. You won’t get a tax deduction, but unlike a traditional IRA, the earnings in a Roth are not taxed when you withdraw them. Depending on your circumstances, a Roth IRA could generate more after-tax cash flow in retirement. If you earn less than $144,000 as a single filer or $214,000 as joint filers, you are eligible to contribute to a Roth IRA for 2022.

Make Sure You Apply Your IRA Contribution to the Correct Year

It’s not uncommon for people to make an IRA contribution for the prior year but accidentally apply it to the current year. When you make an IRA contribution, you are asked by the IRA provider if you want to use it for the prior year or the current year. If you check the wrong box, you will not receive the tax deduction for 2022. If that does happen, you can go to your IRA custodian and complete a form to reclassify for the prior year.

Is a Last-Minute 2022 IRA Contribution Right for You?

All major money moves have consequences. What’s right for one investor may not be ideal for another. Accordingly, your decision to make a last-minute traditional IRA or Roth IRA contribution will have tax and retirement planning implications that should be discussed with your advisors.

Don’t have a retirement plan yet? Not confident in your current retirement plan? Or simply need a retirement plan check-up? No matter where you are in your retirement planning journey, our team can help. Simply schedule an appointment with one of our trusted advisors to discuss your opportunities today.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Every year brings new tax rules and updates, so it’s important to take a quick look at retirement tax changes for 2021. Find out about possible tax increases. Manage your tax liability by using your retirement accounts and other tax deductions. 

Tax Changes for Standard Tax Deductions

The standard deductions increase slightly due to inflation adjustments, to $12,550 for single filers and $25,100 for married filing jointly. Thanks to the TCJA, you’re still limited to only $10,000 in state and local tax deductions.

While the tax rates remain the same as the previous year, the good news is that the income brackets have been adjusted slightly upward compared to 2020. The top rate of 37% applies to singles making over $523,600 and joint filers with incomes over $628,300. 

Capital gains tax income brackets have also been revised upwards, with 0% tax liability for singles making up to $40,400 and MFJ up to $80,800. The top rate of 20% is levied on singles with an income of $445,850 and joint filers earning at least $501,600.

Similarly, their hasn’t been much tax change to the retirement account and contribution landscape for 2021. Unfortunately, there were no inflation adjustments in contribution amounts to your employer retirement plan compared to last year. 

However, the income levels at which phasing out and eliminating deductible or Roth contributions to an IRA increased slightly for 2021. This increase is good news for anyone who may be interested in allocating funds to an IRA in addition to maximizing their employer plan.

Required Minimum Distributions Tax Changes (RMDs)

You don’t have to start taking RMDs from a qualified retirement account until the year you turn 72. As a reminder, you’ll have RMDs from your employer retirement plan, including Roth 401(k), but not from your Roth IRA.

You can still delay taking your first distribution until April 15 of the following year, but after that, you must take your RMDs by December 31 each year. If you delay your first year’s RMD, you’ll have two to satisfy the year you turn 73. For that reason, we usually don’t recommend it, but you may have a unique situation in which delaying your first RMD would benefit you tax-wise.

The government waived 2020 RMDs due to the coronavirus. Unless there’s a different announcement, the requirements are back in force for 2021, erasing those tax changes in 2020.

However, you can potentially avoid paying the income taxes on an IRA by using a Qualified Charitable Distribution. Withdrawals from your Traditional IRA up to $100,000 that are contributed to a qualified charity are tax-free. The funds must go directly to the organization without making a pit stop at your bank account along the way, and a QCD can’t be used on a 401(k) or employer plan.

IRA contributions and other tax changes

If your employer doesn’t offer a retirement plan, you can contribute up to $6,000 in either a Traditional or Roth IRA. There is an additional catch-up of $1,000 for those age 50 and older. While their may not be many tax changes, you can change your contributions if you are not maximizing those now.

If your employer does have a retirement plan, whether or not you choose to take part in it, your ability to make a deductible Traditional IRA contribution or Roth IRA contribution is capped at certain income limits. 

Remember, however, that you can always kick in nondeductible Traditional IRA funds up to the contribution limits. You’ll need to keep good records of what is deductible and what is not for determining the tax status of withdrawals later.

• Deductible Traditional contributions
  • Begin to phase out at incomes of $66,000 if filing single/$105,000 for married filing jointly (for the person covered by an employer plan).
  • Not allowed at incomes over $76,000 single/$125,000 married filing jointly.
  • Begin to phase out at $198,000 for married filing jointly for the person who is not covered by an employer but whose spouse is) and not allowed above earnings of $208,000.
• Roth IRA contributions
  • The maximum contribution is permitted for singles whose income is less than $125,000 and those married filing jointly with income less than $198,000.
  • Contributions decline as incomes rise and reach zero for singles making at least $140,000 and couples filing jointly above $208,000.
• Married filing separate
  • Whether contributing to a Traditional IRA or a Roth, an income of over $10,000 prevents IRA contributions if employer plans cover you.

No tax changes on contributions to employer retirement plans (other than SEP/SIMPLE IRAs)

If you have a 401(k), 403(b), 457, or Thrift Savings Plan (TSP), your salary deferral contribution limit remains at $19,500. Workers over age 50 can also add a $6,500 catch-up for a total of $26,000.

However, some plans don’t limit you to just the salary deferral and employer match. The total annual 401(k) contribution limit is $58,000 for those under 50 and $64,500 over 50. Potentially, if your plan allows, you can then add after-tax money to your 401(k) plan on top of your match and salary deferral. If you’re unsure, ask HR or the third-party administrator (TPA) on the plan.

We explained in an earlier post how this works, but here’s a shorter version for illustrative purposes. Suppose you’re under age 50, so you set aside the maximum of $19,500. Your employer adds a $2,500 match, so you have contributed a total of $22,000. If the plan allows, potentially, you could add in another $36,000 after-tax, which would grow tax-deferred inside the 401(k). 

After-tax contributions into your employer plan can later be rolled into a Roth IRA, in what’s known as a Backdoor or Mega Roth. Investors who, because of their income, cannot contribute to a Roth IRA may find this technique valuable. So while there are not many tax changes, you can open new accounts or structure your retirement accounts to maximize you tax savings.

Health Savings Accounts (HSAs)

While these aren’t technically retirement accounts, you can use HSAs to bolster your nest egg. Unlike flex savings accounts or FSAs, they roll over from year to year. If you don’t use them for medical expenses, you can save them later, and the money grows tax-deferred.

These limits apply to the total contribution; that is, employer + employee, not employee alone. There’s also a slight difference in the $1,000 catch-up provision compared to what you find on retirement plans because the additional allowance is for workers age 55 and older.

• Self only 
  • $3,600 contribution limit
  • $1,400 minimum deductible
  • $7,000 out-of-pocket maximum
• Family plan 
  • $7,200 contribution limit
  • $2,800 minimum deductible
  • $14,000 maximum out-of-pocket

Want to talk about how to maximize your tax savings and what accounts you should set up to reduce your tax liability? Feel free to give us a call at (619)255-9554 or send us an email to set up an appointment.

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Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.