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There’s Still Time To Max Out Your 2016 Tax Deductible Contribution

Tax season is fast approaching. One way to make the most out of your money is by maxing out your 2016 tax deductible contributions to your individual retirement accounts (IRA). Each type of retirement account has a different annual contribution maximum and certain accounts, like a Roth IRA, have contribution income limits.

Contributing to your IRA and/or 401(k) will lower your adjusted gross income and the amount of income tax you potentially have to pay, while compounding your savings over time. Before you file your taxes, make sure you take full advantage of the tax deductions you can claim.

Contribution Limits

Contribution limits can change from year to year for a traditional IRA and are set by the government. In contrast, contribution limits for 401(k)s are set by employers and can vary from company to company. This year, contributions for IRAs haven’t changed, which is one less thing you have to think about as you prepare for tax season. In 2017, you can still contribute up to $5,500 a year to your traditional or Roth IRA.

While a traditional IRA and a Roth IRA are similar, they have their important differences. With a traditional IRA you are contributing “pre-tax” dollars, and with a Roth IRA you are contributing “after-tax” dollars. That means that while a Roth IRA doesn’t provide the tax deduction of a traditional IRA, the withdrawals and earnings are typically considered tax-free.

Don’t Forget About the Catch-Up Provision

Feeling like you’re a little behind on saving for retirement? If you are over 50, you are eligible to take advantage of the “catch-up provision” which allows you to contribute an additional $1,000 a year for a total of $6,500. While this might not seem like that much, every penny counts when you are no longer working and bringing in a steady paycheck. This provision is no substitute for starting to save early, but it helps ease the mind to know you can contribute more as you begin to reach retirement.

Income Limitations

The catch with Roth IRA’s is that they have an contribution income limit. This basically means that if you make over a certain amount of money you are not allowed to contribute to a Roth IRA. For a single filer, the income threshold starts at $118,000 and ends at $133,000. For married filers, it starts at $186,000 and ends at $196,000.

What if your AGI is above the income limit to contribute to a Roth IRA? If it is just a bit over the limit try contributing the maximum to your 401(k) in order to potentially lower your AGI enough to contribute to a Roth IRA. And, if you are married, don’t forget about your spouse’s 401(k). By contributing to both your and your spouse’s 401(k) your income may enter the threshold to allow at least a partial contribution to a Roth IRA.

Deductions

Saving for your retirement provides stability for your future, but it also provides an additional benefit—you become eligible for a tax deduction. If you have a workplace retirement account, you can claim a tax deduction for your IRA contributions, as long as your income does not exceed certain annual limits. In 2017, single contributors phase out of tax deduction eligibility if they make between $62,000–$72,000 a year. Married couples are offered the same deduction, though they phase out of eligibility if they make a combined income of between $99,000–$119,000 a year.

How I Can Help

Many people miss out on tax deductions simply because they are unaware they are eligible for a deduction. You may be overlooking opportunities to save and put your money to work for you. That’s where I and the professionals at Key Wealth Partners are here to help. We would love the opportunity to review your financial situation to make sure you are not paying more in taxes than necessary. Maxing out your 2016 tax deductible contributions to retirement accounts is one way to put your money to work. To set-up an appointment give me a call at (717) 283-4186 or email me at dniggel@keywealthpartners.com.

About David

David Niggel, CFP®, ChFC®, AIF® is the founder and president of Key Wealth Partners, LLC, an independent wealth management firm serving individuals, families, and business owners. Along with over a decade of financial services experience, he has advanced knowledge and training in providing holistic financial planning with fiduciary and ethical care, holding the CERTIFIED FINANCIAL PLANNER™, Chartered Financial Consultant®, and Accredited Investment Fiduciary® certifications. With hands-on entrepreneurial experience, he has the unique ability to help clients meet both their individual and business goals. Based in Lancaster, he serves clients through the York, Harrisburg, Hershey, and Central, Pennsylvania areas. Learn more by visiting www.keywealthpartners.com or connecting with David on LinkedIn.