The One Thing You Might Not Be Doing During Tax Season That Could Save You Money
If you’re looking to save money on your tax return this year, then you might want to max out your retirement account. Whether it’s a 401(k), 403(b), IRA or another, retirement accounts can reduce tax bills and help you save money. Here’s how.
Max out your retirement account contributions.
Every year, you have a certain limit to the amount of money that you can contribute to your retirement account, depending on your income and employment status. For the 2018 tax year, you can contribute the following amounts if you’re single and have just one of these retirement accounts:
- $18,500 into a 401(k), 403(b) or other workplace retirement account
- $55,000 into a self-employed IRA or solo 401(k)
- $5,500 into an IRA
- $12,500 into a SIMPLE IRA
If you’re at least 50 years old, you can also take advantage of the catch-up contribution limit, which is $6,000 for a 401(k) and $1,000 for an IRA for the 2018 tax year. And if you have both an IRA and a workplace retirement account like a 401(k), you can still contribute, though the amount is phased out based on your adjusted gross income (AGI). However, if you (and your spouse if you’re married) aren’t covered by a workplace retirement account, you can take the full tax deduction that you receive from contributing to your IRA. Roth IRA contributions are not tax deductible.
This means you have until April 15, 2019, AKA Tax Day, to make these contributions to your retirements accounts if you want to reduce your tax bill.
Reduce your tax bill.
Now, the amount of money you save on your tax bill depends on which tax bracket you’re in. If you’re in the 22 percent tax bracket with an annual salary between $38,701 and $82,500 and contributed the maximum amount of $18,500 to your 401(k), then you could reduce your taxable income by $4,070. If you don’t have a 401(k) or an
Don’t forget about the Saver’s Credit, too.
If your salary is on the lower side, you might be able to save even more during tax season. Known as the Saver’s Credit, you could claim up to $2,000 (or $4,000 if married and filing jointly) more toward your tax bill if you’re 18 years or older, not a student and not claimed as a dependent on another person’s tax return.
Though the maximum credit is worth $2,000 or $4,000, you may receive less because it all depends on your AGI and the amount that you contributed to your traditional 401(k) or IRA. For the 2018 tax year, you might be eligible to receive:
- 50 percent of your contributions if your AGI was $19,000 or less (single) or $38,000 or less (married, filing jointly)
- 20 percent of your contributions if your AGI was between $19,001 and $20,500 (single) or $38,001 and $41,000 (married, filing jointly)
- 10 percent of your contributions if your AGI was between $20,501 and $31,500 (single) or $41,001 and $63,00 (married, filing jointly)
Increase your savings for retirement right now.
Regardless of the tax benefits, maxing out your retirement account contributions will help you save money no matter what. You’re able to contribute a certain amount every year. However, once that tax year is over, you can’t play catch-up and are, once again, limited to the maximum contribution. If you don’t max out your retirement account contributions every year, you could end up losing out on a lot of money for retirement.
While you might not be able to max out your accounts because of student loan debt, bills and other costly expenses, it’s always smart to contribute what you can. Build it into your budget now and you’ll end up saving a lot more money for your future… and we bet you’ll never regret that.
Sign up for Savvy Saver by Swirled, our newsletter featuring budget hacks and important (yet fun) financial info. Saving money just makes cents!
Sign up for our newsletter.
Say hello to the best part of your day.