It’s not too late to cut your 2021 tax bill!!!
You heard that right.
Pay your future self and reduce your tax bill simultaneously. We’re talking about IRAs – Individual Retirement Accounts. There are many types of IRAs but today we are focused on traditional IRAs and SEP IRAs.
Let’s get into it!
Traditional and SEP IRAs are tax-deferred, meaning your contributions are tax-deductible now. But you pay the tax later when you withdraw from the account. If you make withdrawals before the eligible retirement age, you also pay a 10% early withdrawal penalty.
Be aware that there are income limits when it comes to the tax-deductibility of traditional IRAs. Here’s a handy breakdown of those income limits. Make sure to consult with your tax advisor to determine which type of IRA is best for your situation.
For 2021 and 2022, you can contribute $6,000 to a traditional IRA (or $7,000 if you’re 50 or older).
Now let’s get into the big dawg of IRAs! SEP IRAs.
SEP IRA stands for Simplified Employee Pension. Unlike traditional IRAs, only the self-employed and S-Corporations are eligible to contribute to a SEP IRA.
For 2021, the maximum SEP IRA contribution for non-S-Corp self-employed folks is the lesser of 20% of gross income or $58,000 whichever is lower. That number increased to $61,000 for 2022. If you are a contractor, sole proprietor, or LLC owner, then this tax-saving opportunity is for you.
For S-Corp owners (employers), the maximum 2021 contribution limit is the lesser of 25% of salary or $58,000. That number increased to $61,000 for 2022. Be aware that SEP IRA contribution limits and requirements for S-Corporations can get a bit tricky if there are other employees besides the owners. You definitely want to consult your tax professional if you are in this boat.
Pay Your Future Self While Cutting Your Current Tax Bill
If you are reading this before the April tax deadline, you may be eligible to make a tax-deductible IRA contribution that counts towards last year.
And if it’s after April but you filed an extension to gain more time to file your taxes, then you have until October’s extended tax deadline to make this contribution.
Therefore, go ahead and set aside some cash for retirement, your tax bill (and your future self!) will thank you.
You may be wondering:
Should I make a last-minute IRA contribution?
Duh! When your accountant prepares your tax return, make sure they plug in your maximum IRA contribution limit and watch your tax bill decline. I love doing this for my clients. No matter how high the tax bill is, whenever they learn of an opportunity to give Uncle Sam less money while also investing in their future self, they tend to find the money to make it happen. Remember ,the last day to contribute to an IRA that still counts towards last year is the tax filing deadline.
This Maximize just scratches the surface of traditional and SEP IRA contributions, but I wanted to get you the basics. Talk to your tax professional and consider making this last-minute, tax-saving contribution!
Disclaimer: This blog is for educational and conversational purposes only. Blog posts and social content from Obih Collective Inc. are not legal tax advice. Please consult a tax professional before making any tax decisions based on this information.