This year, as a result of the coronavirus pandemic, the IRS extended the tax-filing deadline income earned in 2019 from April 15 to July 15, which also gave Americans three months longer to put money in their IRA (the deadline for contributions is on Tax Day).
The maximum annual contribution for traditional and Roth IRAs for most Americans is $6,000. If you're over the age of 50, you can add an additional $1,000.
Traditional IRA contributions may be tax-deductible -- withdrawals are typically taxable -- although there are several complicating factors, including income limits and whether you or your spouse are covered by a workplace retirement plan. For instance, your deduction may be limited if you or your spouse are covered by a retirement plan at work and your income exceeds certain levels. But your deduction is allowed in full if you aren't covered by a retirement plan at work, according to the IRS.
By contributing to a traditional IRA ahead of the tax deadline, taxpayers have a chance to save on their income taxes.
For instance, if you were in the 25 percent tax bracket and contributed the maximum $6,000, you would reduce your taxable income by the same amount. That would reduce your overall tax burden by $1,500, according to Bankrate.com, meaning the government is essentially paying you to save money.
If you do have a retirement plan at work, the threshold of how much you can deduct from your overall tax bill depends on how much money you earn. If you earn less than $64,000 for 2019, you can still deduct the full amount. Married couples filing jointly can jointly earn up to $103,000 and still receive full deductibility.
For low-income taxpayers, they can take advantage of the additional Saver's Credit bonus, which can help reduce their tax bill by up to $2,000, according to Bankrate.
While an IRA can help to reduce your tax obligation, the IRS may impose limits on how much you can deduct, depending on your income. Still, whether or not you exceed those limits, you can still contribute to an IRA, which will ultimately help protect your retirement savings from taxes.
Roth IRA contributions are not tax-deductible (but income limits still apply for those making contributions).