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PENSCO Blog

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

How to Pay Less in Taxes by Opening an IRA

  |  By Karen Walls

With tax season here, many of us are thinking about how to pay less on our impending taxes. One way to lower that bill is to open an Individual Retirement Account (IRA), and to make a contribution to the account by Tax Day. Not only does contributing to an IRA help to build your retirement savings, but it could also help with tax savings because the annual contribution may apply as an IRA tax deduction.

If you are considering opening an IRA by the tax filing deadline, here is what you need to know:

Do You Qualify to Make a Contribution?

You must have taxable income on your income tax return 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 examples of what is not classified as taxable income.

Age Consideration

To contribute to a Traditional IRA you must be under the age of 70 ½ at the end of the given tax year. Once you reach age 70 ½ you are required to begin taking Required Minimum Distributions (RMDs) based on your life expectancy. (If you want to learn more about RMDs, you can read about the 6 most frequently asked questions that we receive from clients here.)

Contribution Limits

For tax year 2015, 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 2016. Contributions for 2015 tax year can be made until April 18, 2016, excluding any tax filing extensions. (While April 15 is the typical due date for contributing to an IRA, the date has been pushed back in 2016 due to several holidays.)

Starting January 1, 2016, you can also begin making a current year contribution. This means between January 1st and April 18th, 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.

Traditional IRAs Grow Tax Deferred

For a Traditional IRA you do not pay income tax until you begin taking distributions. This tax deferred status is a great way to grow the earnings in your retirement plan by letting compounding do its magic. There is also a Roth IRA plan where the income is taxed at the time of investment. The earnings then grow tax free. Yes, tax free! Roth IRA contribution limits are the same as Traditional IRAs, however the amount you can contribute may be affected by your tax filing status and your modified adjusted gross income. It's always best to talk to a tax advisor to fully understand your tax scenario.

If you’re considering opening an IRA, now is the time. At PENSCO we make it possible to invest in real estate, private equity and notes through a self-directed IRA. Interested in learning more about how IRAs work and alternative investments? Download our free IRA Investors Guide:

This Blog does not provide 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.

This blog has been updated from its original version published in March, 2015. This blog does not provide 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.