Want to Lower Your Taxes? Consider Opening an IRA by Tax Day
Editor's Note: This blog has been updated to address the IRS' Coronavirus Tax Relief announcement.
With tax season underway, many Americans are searching for ways to lower their tax bill. Opening a traditional IRA and making a contribution to the new retirement account by Tax Day 2020 could be one way to reduce your tax bill.
Opening and 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. If you are exploring ways to lower your tax bill by opening a traditional IRA, here is what you need to know:
Who can open a traditional IRA?
Generally speaking, anyone who is under the age of 70½ can open a traditional IRA. You are also allowed to have multiple retirement accounts. That means if you already participate in a 401(k) plan through your employer, you may still be eligible to open a traditional IRA to save for retirement. But you must have taxable income during the year to contribute to an IRA (more on this below).
To lower my taxes by Tax Day 2020, why must I open a traditional IRA?
Traditional IRAs and Roth IRAs are structured differently. Traditional IRAs may be funded with pre-tax dollars, and earnings in the account grow tax deferred. That means the annual contributions you make into a traditional IRA may be deductible, depending on your income and whether or not you or your spouse already participate in a retirement plan at work.
But annual contributions to Roth IRAs are not tax deductible because you make contributions to the account with after-tax dollars. However, you can make tax-free withdrawals from the account once you hit the age of 59½.  (This handy chart from the IRS compares traditional IRAs with Roth IRAs.)
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.
Is there a maximum age for contributing to an IRA?
As of January 1, 2020, thanks to the SECURE Act, there are no longer any age restrictions on making contributions to traditional IRAs. Previously, you were required to be under the age of 70½ at the end of the given tax year to contribute to a traditional IRA.
There is no maximum age for contributing to a Roth IRA.
What are IRA contribution limits?
For tax year 2019, if you are under the age of 50, you are allowed to contribute up to $6,000 into an IRA. If you are 50 and over, the IRS allows you to contribute up to $7,000. The contribution limits are the same for tax year 2020. Contributions for the 2019 tax year can be made until July 15, 2020, excluding any tax filing extensions.
Starting January 1, 2020, you can also begin making a current year contribution. This means between January 1st and July 15th, you can make a combined IRA contribution (for 2020 and 2019) of $12,000 if you’re under 50 and $14,000 if you are 50 and over, if you qualify.
If I want to lower my tax bill, when should I open an IRA?
If you're considering opening an IRA so you can take a tax deduction on your 2019 taxes, you must open and make a contribution to your account before Tax Day 2020, which is July 15.
But remember: Opening an IRA is a serious decision that should take into account your current financial situation and your long-term savings goals. A financial professional can help you weigh the pros and cons of opening a retirement account and can help you determine any potential 2019 tax benefits.
If you are interested in opening an IRA, please call PENSCO at 866.818.4472. We can assist you in opening a traditional IRA or a Roth IRA. If you have questions about an existing PENSCO IRA, you can reach us at 800.962.4238.
 Tax-free earnings are dependent upon compliance with IRS rules for withdrawals from Roth IRAs, which are outlined here.
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.
Pacific Premier Trust (formerly 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. Pacific Premier Trust is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.