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Last-Minute Retirement Plan Moves that can cut your Tax Bill

Last-Minute Retirement Plan Moves that can cut your Tax Bill

March 01, 2024

It may be 2024, but taxpayers still have time to make last-minute retirement contributions that could lower their 2023 tax bill.

While most tax-saving moves must be made by December 31 to count for that year's return, certain retirement maneuvers related to Traditional and Roth IRAs can be done several months into the following year. For these contributions, tax year 2023 doesn't end until April 15, 2024. The ability to deduct a contribution to a traditional IRA depends on the saver's income and other factors, such as whether the taxpayer is covered by a 401(k) or other workplace retirement plan.

The savings can be up to thousands of dollars a year for millions of taxpayers. A big lump-sum payment into a retirement account is eligible for a full or partial tax deduction. And taxpayers who don't qualify for a tax break still benefit from the April deadline as a way to boost their retirement savings.

Among the many ways Americans can benefit, a single taxpayer with no workplace plan can deduct the full amount of an IRA contribution. A single taxpayer with a workplace plan gets a full deduction with an adjusted gross income of $73,000 or less (in 2023).  For married couples filing jointly, both spouses can deduct the full amount of an IRA contribution if neither has a workplace plan. If only one spouse has a workplace plan, the other can get a full deduction for IRA contributions if their joint income is $218,000 or less (in 2023).

A client contacted our office recently and made a last-minute $7,000 IRA contribution for the tax year 2023. It saved her nearly $2,000 in federal and state income taxes.  She had money sitting in the bank. Why not put it in an IRA and save on taxes?  This client could have contributed anywhere up to $7,500. For every $100 contributed, she would save $27.75 in taxes. I explained to her that it's more of a cash-flow question of whether you should or shouldn't contribute.

Despite the benefits, many taxpayers are leaving money on the table. In the tax year 2021, 85% of all U.S. households made no contributions to traditional IRAs or Roth IRAs, according to the Investment Company Institute.  Anyone with earned income can open an IRA. 2023 & 2024 IRA Contribution Limit

Traditional IRA vs. Roth IRA

Many taxpayers choose a traditional IRA for the upfront tax break, Contributions to traditional IRAs are often tax-deductible, but withdrawals years later in retirement are taxed at the same rates as ordinary income, like wages. By contrast, there is no deduction for contributions to a Roth IRA. But by contributing now, you're setting yourself up for tax benefits that come later given withdrawals can be done tax-free. Eligibility to contribute to a Roth IRA directly is based on your income. For tax year 2023, the limits for most single filers begin at $138,000 and $218,000 for most married joint filers.

Nondeductible IRAs

The April deadline allows taxpayers who don't qualify for a deduction for a traditional IRA to top up their retirement savings by making after-tax, nondeductible contributions to a traditional IRA. The money grows tax-free, and only the earnings are taxable when you take withdrawals in retirement. Taxpayers who make these contributions need to keep track of how much they have contributed over time.

When to Consider a backdoor Roth IRA

Taxpayers who earn too much to contribute directly to a Roth IRA can still do so via a two-step process known as a backdoor Roth. First, contribute to a traditional nondeductible IRA. Then immediately move the money into a Roth IRA, pay any income tax on the earnings, and leave the money to grow tax-free

Options for business owners or the self-employed

For self-employment-employed taxpayers, the contribution limit for SEP-IRAs is $66,000 for tax year 2023. In many cases, savers can make contributions for 2023 until October 16, 2024, if they have requested an extension to file their returns. 

Unfortunately, small-business owners often put money back into their businesses and neglect saving for themselves.

Save your tax refund

Consider using some or all of your tax refund to increase your retirement savings. You can include your retirement account routing information on your 1040 tax return. It's a subsidized retirement account.

If you would like to make an IRA contribution for the 2023 tax year before filing your taxes, please give our office a call at (207) 761-4733, or email retire@iisfinancial.com. As always, do not hesitate to reach out with any questions.


View our 2023 and 2024 Financial Data Chart tax bracket and financial data charts here

 For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisors LLC nor any of its representatives may give legal or tax advice.