If you're like most Americans, now's the time of the year when you're likely to have taxes on the brain. With the filing deadline less than two months away, countless workers will no doubt spend the coming weeks combing through documents, crunching numbers, and attempting to eke out the maximum amount of savings possible on their 2017 returns. The bad news, however, is that the overwhelming majority of filers might end up missing out on an extremely lucrative tax break -- and the reason could boil down to a lack of knowledge and awareness.
Will you miss this critical tax-saving opportunity?
Many tax filers are aware that the more deductions they're able to claim, the more of their money they stand to shield from the IRS. But what some Americans don't realize is that they still have time to capitalize on perhaps the greatest deduction of all: IRA contributions.
One thing you should know about IRAs is that they come in two main varieties: the traditional and the Roth. With the latter, you don't get an immediate tax break for contributing, but if you fund a traditional IRA, that money is deductible for the tax year for which that deposit is earmarked. In other words, if you put money into your 2017 traditional IRA, you reap the related tax savings on your 2017 return -- even if you didn't actually make that contribution in 2017.
So at this point you're probably thinking: "How can I fund my 2017 IRA if 2017 is already behind us?" Well here's some good news for you: You actually have until the tax filing deadline of the following year to fund an IRA for any given year, so if you've yet to max out your 2017 IRA, you have until the 2018 tax filing deadline of April 17 to get that account fully funded. As long as your contribution clears by that deadline, you can write it off on last year's return.
Clearly, this is a major money-saving opportunity, since workers under 50 can contribute up to $5,500 annually to an IRA, and workers 50 and over can contribute up to $6,500. Remember, when you fund an IRA, your savings become a function of your effective tax rate, and the higher that rate is, the more you stand to benefit. So let's say you haven't touched your 2017 IRA thus far, yet manage to put $5,500 into that account prior to April 17 of this year. If your effective tax rate is 30%, you'll be looking at $1,650 in tax savings -- just like that.
Unfortunately, 93% of Americans aren't planning to fund an IRA between now and the April 17 deadline, according to a new NerdWallet study, and it's not just a matter of them not having the cash -- an estimated 75% of U.S. adults think it's illegal to fund a 2017 IRA at this point. If you're one of them, consider this your wake-up call that it isn't too late to squeeze out some last-minute tax savings and help secure your financial future at the same time.
Benefits you don't want to miss
Not only will funding an IRA work wonders for your taxes at present, but doing so can also set the stage for a more fiscally sound retirement. Most workers need to replace roughly 80% of their former income to live comfortably in retirement, and in a best-case scenario, Social Security might cover up to half that amount. This means that it's on you to accumulate the rest by saving diligently during your career.
The good news, however, is that if you max out your IRA year after year while you're working, you stand to retire with quite a substantial sum. In fact, if we assume that you start maxing out your IRA at age 25 and do so all the way until age 65, you'll retire with $1.1 million if your investments give you an average annual 7% return, which is more than doable with a stock-heavy portfolio. This calculation also assumes that the annual limits stay the same. If they increase over time and you keep maxing out, you stand to retire with even more.
So there you have it: Funding an IRA will benefit you in more ways than one, and it's by no means too late to max out your 2017 account. Furthermore, you don't need to itemize on your tax return to deduct your IRA contribution, so if you have the money to fund that account, or the ability to get it, it pays to jump on this key opportunity.
The $16,122 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.