BY ROSALYN PARTIN, MANCHESTER H&R BLOCK
Contributions to retirement accounts can be a great way to reduce your taxable income and thereby reduce your tax. Many employers offer retirement plans such as 401K, SEP, or Simple plans. These employer sponsored plans allow the employee to contribute a portion of their taxable wages into their retirement account, thus deferring the tax on the income until the money is withdrawn from the account. An added benefit of these plans is when the employer also contributes to the employee’s account as a matching contribution.
Contributions may also be made to Individual Retirement Accounts (IRA). The 2021 contribution limit for IRAs is $6,000 per taxpayer with an additional $1,000 allowed for taxpayers age 50 and over. There are 2 types of IRAs; Traditional and Roth. Many people who set up a traditional IRA can deduct their contributions. The IRA deduction can lower your taxable income, thus reducing taxes owed. You can claim this deduction even if you use the standard deduction. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.
Roth IRA contributions are not tax deductible. However, in most cases all distributions you take from the Roth account at retirement will be nontaxable. This feature makes Roth IRAs a good planning device for receiving tax-free income at retirement and may be appealing for people who believe they will be paying more taxes in later years. This is also a good option for people who cannot fully deduct a traditional IRA contribution.
IRA contributions for the year can be made up until the return filing deadline (usually April 15). Therefore, some taxpayers find it beneficial to wait until their tax return is being prepared to determine if they want to contribute to a Traditional IRA or Roth IRA.
If you have questions about retirement plans, please call your local H&R Block office. In Manchester TN call 931-728-9462. H&R Block Has Your Back!