The reason this particular strategy can save you money is because, when you contribute to an IRA, “you can deduct that contribution from your taxable income for 2018,” Andrea Coombes, a tax specialist at NerdWallet, tells CNBC Make It.
“Say you’re earning $50,000 a year. If you qualify for a deductible contribution and you can put in $5,500, the maximum in 2018 if you’re under age 50, that will drop your taxable income to $44,500. If your top tax rate is 22 percent, you’re shaving $1,210 off your tax bill, and you’re saving for retirement, too.”
Keep in mind that this strategy only applies to a traditional IRA, not a Roth IRA. “There’s a lot to love about Roth IRAs,” says Coombes — with this retirement account, contributions are taxed when they’re made, so you can withdraw the contributions and earnings tax-free once you reach age 59½ — “but they don’t give you a tax break in the year you contribute.”
While anyone can contribute to a traditional IRA, for that contribution to be deductible, there are stipulations to keep in mind, says Coombes: “As long as you, and your spouse if you’re married, don’t have a retirement plan at work, then most likely you should be eligible to deduct your IRA contribution. If one or both of you has a retirement plan at your job, then income limits come into play. Basically, if you’re doing OK, income-wise, then the rules limit how many retirement-savings tax breaks you can claim.”
To see if you qualify for tax savings by contributing to an IRA, check out NerdWallet’s handy chart, which breaks down the deduction limits.
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