Whenever someone tells you something that seems too good to be true, your guess is often correct. However, since 1974, individuals have had the option of "keeping their money and reporting a tax deduction" which seems too good to be true.
Sure, there are a few rules and caveats to be aware of in order to make the deduction, but overall, the individual retirement account (IRA) is a powerful planning tool for your future.
Many changes have been made that will affect IRA investors. The basic requirement of "having your cake and eating it too" persists for these types of accounts. Due to the recent announcement by the IRS of postponing the original due date of each return, you have an additional month to contribute to your IRA and apply for a 2020 tax deduction. If you live in a designated disaster area like the state of Oklahoma, the president's statement moves the filing date for individuals to June 15, 2021. Ultimately, you can fund your IRA on or before June 15, 2021 and get a 2020 tax deduction.
Too many people are not taking advantage of the IRA. Some misunderstandings are often the cause of this misunderstanding. Many people think they are too old to contribute to an IRA. The SECURE Act of 2019 lifted the age limit for traditional IRA contributions. You are no longer limited to contributing to your IRA by the age of 70½. Many of our citizens continue to work during their retirement years. The income may allow the taxpayer to be eligible to contribute to their IRA until they stop working. This is a game changer for individuals in their second career!
Another misunderstanding is the inability of the earning family to contribute to the inactive spouse. For example, by age 30, suppose one spouse works outside the home while the other takes care of the children. If the working spouse is earning an income and meets other criteria, they can contribute $ 6,000 to their own IRA, and their spouse can make a spouse IRA contribution of $ 6,000 to a Traditional or Roth IRA based on their spouse's income.
One of the most common excuses or misunderstandings I hear from individuals when I talk about saving for their future by contributing to their IRA is that they just can't afford it. You don't have to contribute the maximum to your IRA every year to get tax benefits. Every dollar you contribute to your IRA is a potential reduction in your taxable income. A little unknown is the tax law known as saver credit. This can help you in reducing your tax burden. Lower-income workers making IRA contributions can apply for credit.
If you are single and have earned $ 32,500 or less by 2020, you may qualify for this credit against your income tax burden. The maximum loan amount is capped at the first $ 2,000 of your IRA contribution, and you can apply for a 50% loan for a maximum of $ 1,000 for your income tax liability. One of the best ways to teach your kids the power of investing and allowing compound interest so they can accumulate is by donating funds to their traditional IRA, or better yet, a Roth IRA.
For example, suppose your granddaughter got her first job as a teenager and pays her $ 10,000 for 2020. As a wonderful grandfather, and when you find this is an excellent teaching moment, gift your granddaughter $ 2,000 to her Roth IRA. She receives a $ 1,000 savings credit on her 2020 income tax return.
Custom retirement accounts are powerful tools that can be used to generate huge deferred tax savings over time. Start early and teach your children the power of compound interest. Albert Einstein, the famous theoretical physicist, is said to have said: “Compound interest is the 8th wonder of the world. Whoever understands it deserves it … whoever doesn't, pays for it. "
Principal registered securities offered by Cambridge Investment Research, Inc., a broker / dealer, member of FINRA / SIPC. Jimmy J. Williams is an investment advisor who acts on behalf of Compass Capital Management, LLC, a registered investment advisor. Cambridge and Compass Capital Management, LLC are not affiliated. 321 p. 3rd, Ste. 4, McAlester, OK 74501. Cambridge does not provide legal or tax advice. Please contact your legal and tax advisor for information on specific strategies for estate and income tax planning.