Tax season is here, providing us with time to reflect on the year that passed. Even though 2023 is behind us, there are still several tax savings strategies that can be utilized before the filing deadline. Some of these strategies can be used to reduce your tax obligation, while others are just smart money moves that are worth considering.
- Fund a deductible IRA – Most taxpayers with earned income can fund an IRA by April 15, 2024 for the 2023 tax year. Contributions can be deductible under certain criteria. To qualify for a deduction there are different income limitations depending on if you are covered by a retirement plan through an employer and your tax filing status. The maximum contribution for 2023 is $6,500 for taxpayers under age 50, and $7,500 for taxpayers aged 50 and above.
- Fund a Roth IRA – For those who may not meet the criteria to deduct their IRA contributions, they may be eligible to fund a Roth IRA. Although there’s no tax deduction for doing so, the growth in a Roth IRA will be tax free so long as all the IRS rules are met before taking distributions. This can be a great option for people that are in a low tax bracket. The maximum contribution is the same as an IRA.
- Fund a Health Savings Account (HSA) – If you are covered by a high deductible healthcare plan, you have until April 15th to fund a Health Savings Account (HSA). These accounts are unique in that they have a double tax benefit. HSA accounts reduce your taxable income, and invested funds can grow tax free so long as funds are used to cover qualifying health expenses. People with self-only coverage can fund up to $3,850 and those with family coverage can fund up to $7,750 for 2023. Anyone over age 55 can contribute an additional $1,000.
- Fund a non-deductible IRA – If you do not qualify for the deductible IRA or a Roth IRA, you may still be able to fund a non-deductible IRA. This option does not have a maximum income limit and still has the benefit of tax deferral on the growth in the account. There is also a strategy that can be exercised called a back-door Roth, that allows people who are above the income limitations for a regular Roth contribution to fund a non-deductible IRA and then convert it to a Roth.
- Self Employed Retirement Plans – If you are self-employed there are several options that you have time to utilize. Solo 401(k)s, SIMPLE IRAs and SEP-IRAs are all options, but there are a number of rules to be aware of regarding when the plans are established and other details related to the business.
For many Americans, filing taxes will get them a refund on taxes paid throughout the year. I always encourage people who have refunds to use it to fund one of the above options. Work closely with your financial advisor or tax preparer to find the best option for you because the rules are intricate and can be confusing.