Keep in mind that this strategy only applies to a traditional IRA, not a Roth IRA. “A Roth can be a fantastic savings vehicle, but it doesn’t reduce your current tax bill,” says Coombes. “With a Roth, you put money in after you’ve paid tax on it, but then the money grows tax-free.”
While anyone can contribute to a traditional IRA, “for that contribution to be deductible, there are specific rules to keep in mind,” says Coombes. “If you (and your spouse, if you’re married) don’t have a retirement plan at work, then there are no income limits — you can deduct up to $5,500 in IRA contributions. But if you or your spouse has a retirement plan at work, then the maximum amount that you can deduct starts to phase out at certain incomes.”
To see if you qualify for tax savings by contributing to an IRA, check out NerdWallet’s handy chart, which breaks down the deduction limits.
A few other general rules that apply to IRAs: You need to have taxable compensation to contribute; the maximum yearly contribution is $5,500, or $6,500 for people age 50 or older; and if you’re contributing to both a traditional IRA and a Roth IRA, the maximum contribution limit applies to both accounts combined.
Finally, “you must specify whether you want your contribution to apply to your 2017 taxes or your 2018 taxes,” Coombes notes. So if you want to take advantage of this tax-reduction strategy this year, specify that you are making a tax-year 2017 contribution.
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