One of the most effective ways to reduce your taxes and fund your retirement is to max out your available retirement accounts.
If you haven't already funded your retirement account for 2018, you may still do so. You have until April 15, 2019 for contributions to a traditional IRA, deductible or not, and to a Roth IRA.
Your total contributions to all your traditional and Roth IRAs can't be more than $5,500 ($6,500, if age 50 or older) (note: your contribution also cannot exceed your taxable income compensation for the year). Making a deductible contribution may help you lower your tax bill this year.
This IRA contribution limit does not apply to rollover contributions and qualified reservist payments.
If you put off filing your return by filing an extension the deadline for your IRA contribution for 2018 is still April 15, 2019. It is expected that this year a lot of returns are going to be put on extension due to the changes from the Tax Cuts and Jobs Act. However, there is no extension for IRA contributions.
You can fund both your 2018 and 2019 IRA contributions now. If you can only afford one it is better to fund your 2018 now before the April 15th deadline when that opportunity disappears. When you make the contributions make sure the financial institution (or your advisor) designates the investment for the correct year (2018). If a mistake is made and it is applied to 2019 you will miss the 2018 investment opportunity.
In addition to your IRA, you can do a spousal IRA which lets you invest retirement funds on behalf of your spouse even if your spouse earned little or no income (provided you have the earned income to make that investment).
SEP (Simplified Employee Plan) IRAs are for small business owners, freelancers, and employees. SEP contributions are tax-deductible and grow tax free until you with withdraw the funds. If you work for a small employer, the employer must make the contribution for you. The SEP IRA contribution limit is the lesser of 25% of your compensation or $55,000 for 2018. SEP IRA contributions for 2018 can be opened and made until April 15, 2019. However, if you file an extension you have until you file your tax return to make your SEP IRA contribution which can be as late as October 15, 2019.
Solo 401(k)s (also called individual 401(k)) is another retirement fund option, but it is only available to business owners with no employees (which is why it is called “solo” or “individual”). It is not available to employees. The Solo 401(k) is popular because unlike the IRA options you can make contributions both as an employee and an employer. The employee limit is $18,500 (or $24,500 if your 50 or older) (which can be up to 100% of your income) and the employer limit is 25% of your business profit. The Solo 401(k) contribution limit is $55,000 ($61,000 if you are 50yrs old). To contribute to a Solo 401(k) you were required to open the account by December 31, 2018 but you do not have to make the employer contribution until April 15, 2019. If you file an extension you have until you file your tax return to make the employer contribution which can be as late as October 15, 2019.
The sooner you invest the sooner your money works to create gains for you.
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Lisa D Church, CPA, EA, NTPI Fellow, MBA
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