Menu

(866) 818-4472

Open Account Client Login

PENSCO Blog

PENSCO Blog

Fresh alternative asset insights and the latest news on real estate and private equity investing.

Looking to Save on Taxes? Opening an IRA by Tax Day May Help

  |  By Taylor Close

Tax season is underway and that means many Americans are looking for possible ways to save on taxes. One way you may be able to reduce your taxable income is by opening a Traditional IRA and making a contribution to your new retirement account by April 17, 2018 — Tax Day.

Contributing to a Traditional IRA allows you to build your nest egg with the added benefit of tax savings because your annual contribution may count as a tax deduction and lower your taxable income. If you are considering opening a IRA to save on taxes, here is what you need to know:

Who can open a Traditional IRA?

Generally speaking, anyone who is younger than 70½ can open a Traditional IRA, but there are income eligibility requirements for funding a Roth IRA. You are also allowed to have multiple retirement accounts. If you already participate in a 401(k) plan through your employer, you may still be eligible to open an IRA to save for retirement.

But you must have taxable income during the year to contribute to an IRA (more on this below).

Traditional IRA or Roth IRA?

If you are considering opening an IRA to try to reduce your taxable income, you need to open a Traditional IRA. Traditional IRAs may be funded with pre-tax dollars, and earnings in the account are allowed to grow tax-deferred. Annual contributions to a Traditional IRA may be deductible, depending on your income and whether or not you or your spouse already participates in a retirement plan at work.

On the flip side, annual contributions to Roth IRAs are not tax-deductible because you make contributions to the account with after-tax dollars. However, in most cases you can make tax-free withdrawals from the account once you hit the age of 59½.[1]

This handy chart from the IRS offers a side-by-side comparison of Traditional and Roth IRAs, outlining who can contribute, how much you can contribute and when you can withdraw your money.

There are several factors to consider when choosing between a traditional or a Roth IRA. One important determining factor is based on your short- and long-term financial picture. If you expect to find yourself in a lower tax bracket after you retire, a Traditional IRA may make more sense because contributions made today may be deductible. But if your tax rate is likely to climb as you reach retirement, you may favor a Roth IRA because withdrawals may not be taxed.

Do I qualify to make an IRA contribution?

You must have taxable income during the year to contribute to an IRA. This income includes wages, salaries, tips, commissions and bonuses. Self-employment income is also included. Interest, dividends, rental income and proceeds from life insurance policies are some examples of what is not classified as taxable income.

How old do I have to be to contribute to an IRA?

There is no minimum age requirement for opening and contributing to an IRA. But, as I noted in my answer to the question above, you must have taxable income on your income tax return to contribute to an IRA.

However, there is an age maximum for contributing to a Traditional IRA. You must be under the age of 70½ at the end of the given tax year to contribute to a Traditional IRA. Once you reach 70½ you are required to begin taking Required Minimum Distributions (RMDs) based on your life expectancy. (You can learn more about RMDs here.)

There is no maximum age for contributing to a Roth IRA.

What are IRA contribution limits?

For tax year 2017, if you are under the age of 50, you are allowed to contribute up to $5,500 into an IRA. If you are 50 and over the IRS allows you to contribute up to $6,500. The contribution limits are the same for tax year 2018. Contributions for 2017 tax year can be made until April 17, 2018, excluding any tax filing extensions, but it must be designated as a 2017 contribution or it will be processed as a current year contribution. (April 15 is the typical due date for contributing to an IRA, but the date has been pushed back by two days this year.)

Starting January 1, 2018, you can also begin making a current year contribution. This means between January 1 and April 17, you can make a combined IRA contribution of $11,000 if you’re under 50 and $13,000 if you are 50 and over, if you qualify.[2]

When should I open an IRA?

This is always a personal decision that should take into account your financial situation and your long-term savings goals. If you're considering opening an IRA to reduce your taxable income and save on taxes for 2017, you have to open and make a contribution to your account before April 17.

At PENSCO we custody real estate, private equity, notes and other alternative assets through self-directed IRAs. If you are interested in learning more about IRAs and alternative investments, you can download our free IRA Investors Guide.

This blog is intended for general and or educational purposes only and is not intended as investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”). Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.

Editor's Note: This is an updated version of a blog we originally published in March 2017. We welcome new comments and questions below.

[1] Tax free earnings are dependent upon compliance with IRS rules for withdrawals from Roth IRAs, which are outlined here.

[2] The ability to make contributions for the previous year is impacted by any contributions actually made during that year.