The tax filing deadline of April 18 this year isn’t that far off, but you still have time to take steps that could positively impact your tax returns. So, you might want to consider making tax-smart contributions.
You have until the April 18 filing deadline to contribute to an IRA or open one for the 2021 tax year. When you invest in a traditional IRA, your earnings can grow tax-deferred. and your contributions may be tax deductible, depending on your income level. And following recent legislation, you can now fund a traditional IRA after age 70.5, as long as you have earned an income.
If you invest in a Roth IRA, your contributions aren’t tax-deductible, but your earnings can grow tax-free if you don’t make withdrawals until you’re at least 59½ years old. that you have had your account for five years. For the 2021 tax year, you can put up to $6,000 in an IRA, or $7,000 if you’re 50 or older. (If you make a lot of money, the amount you can contribute to a Roth IRA may be reduced or eliminated, while contributions to a traditional IRA may not be tax deductible.)
If you were eligible to contribute to a Health Savings Account (HSA) last year, you can also contribute for the 2021 tax year, until the April 18 deadline. An HSA has a triple tax benefit: your contributions are made with pre-tax dollars, so they may reduce your taxable income for the year; your income grows tax-free; and your withdrawals are tax-free, provided the money is used for eligible medical expenses. For the 2021 tax year, you can contribute up to $3,600 to an HSA as an individual or $7,200 for a family. And if you’re 55 or older, you can contribute an additional $1,000 to your HSA. Contribution limits include the amount paid by your employer. So, for example, if your employer has already contributed $1,000, you can only contribute $2,600 to your individual HSA or $6,200 for your family. (Again, you can add an additional $1,000 if you’re 55 or older.)
And, as you know, one of the great benefits of a CGS is that it’s not subject to “use it or lose it” rules – you can carry your savings over from year to year. As such, an HSA can be a valuable account to help you build resources for retirement, when your health care costs will undoubtedly rise.
Looking beyond the 2021 tax year, you might want to consider other ways to make tax-smart contributions. For example, in addition to contributing to your IRA and HSA, you may have access to an employer-sponsored 401(k) or similar plan. In 2022, you can contribute up to $20,500 to your 401(k), or $27,000 if you’re 50 or older. And, if your employer allows it, you can exceed these limits by making after-tax contributions. Also, if you need to save for your education, you might want to consider a 529 college savings plan, which offers certain tax benefits.
For more information on the impact of your contributions, in various forms, on your taxes, consult your tax advisor. The more you know, the better your decisions.
This article was written by Edward Jones for the use of Kendra Nolte, the local Edward Jones Financial Advisor in Chillicothe.