IRAs are very versatile financial planning tools. In addition to funding your retirement, they can help you make charitable donations (for example, via the IRA Charitable Rollover provision) and they can come in handy during the tax season, too.
One particularly helpful aspect of IRAs is the option to make IRA contributions count towards the previous year, which can be done up until the tax deadline for that year. In other words, you can still make contributions to your IRA for the year 2012 until April 15th, 2013.
This can help Traditional IRA owners make adjustments during the tax season, as contributing money to a Traditional IRA lowers Adjusted Gross Income (AGI). Taxpayers’ AGI determines many important tax factors, including: tax bracket; itemized deductions; child care and other credits; and eligibility for the Alternative Minimum Tax. As such, using Traditional IRA contributions to lower your AGI can help you qualify for more credits and deductions, and perhaps even avoid a higher tax bracket.
Once you reach 70 ½ you must withdraw a certain percentage of the combined total savings in your Traditional IRA accounts. This is called a Required Minimum Distribution or an RMD, and it can be taken out of just one of your IRA accounts or withdrawn from a combination of accounts. Failing to take your RMD will result in a hefty fee.
So, you have to take an RMD to avoid that fee, but what if you don’t need this extra source of income? If you pay estimated income taxes, you can have some or all of your RMD withheld to pay for the taxes instead. This can be more convenient than making quarterly tax payments. And since the taxes aren’t paid out until the end of the year, it gives the money in your IRA some extra time to grow.
These benefits can help you save some money during the tax season and serve as a nice incentive to save for retirement. As always, please contact your tax advisor for information on how these ideas pertain to your situation.
What are some of the ways you’ve saved on taxes this tax season?