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From The Wall Street Journal: The Last-Minute Retirement Plan Moves That Can Cut Your Tax Bill

BY Spectrum Wealth Management | Mar 30, 2023
By Ashlea Ebeling
February 24, 2023

It may be 2023, but taxpayers still have time to make last-minute retirement contributions that could lower their 2022 tax bill.

While most tax-saving moves must be done by Dec. 31 to count for that year’s return, certain retirement maneuvers related to traditional and Roth IRAs can be done several months into the next year. For these transactions, tax year 2022 actually doesn’t end until April 18, 2023—or even later for some.

These contributions offer the double benefit of boosting future retirement savings and potentially reducing present tax burdens, tax advisers say. The ability to deduct a contribution to a traditional IRA depends on the saver’s income and other factors, such as whether the taxpayer is covered by a 401(k) or other workplace retirement plan. 

For millions of taxpayers, the savings can be up to thousands of dollars a year. A big lump-sum payment into a retirement account is eligible for a full or partial tax deduction. And for those taxpayers who don’t qualify for a tax break, they still benefit from the April deadline as a way to boost their retirement savings.

Among the many ways Americans can benefit, a single taxpayer with no workplace plan can deduct the full amount of an IRA contribution. A single taxpayer with a workplace plan gets a full deduction with an adjusted gross income of $68,000 or less. 

For married couples filing jointly, both spouses can deduct the full amount of an IRA contribution if neither has a workplace plan. If only one spouse has a workplace plan, the other can get a full deduction for IRA contributions if their joint income is $204,000 or less.

Diane Benson, a 70-year-old retail store manager in Atlanta, recently made a last-minute $7,000 IRA contribution for tax year 2022. It saved her nearly $2,000 in federal and state income taxes. 

“She had money sitting in the bank. Why not put it in an IRA and save on taxes?” said Tracey Ann Gordineer, an enrolled agent in Buford, Ga., who prepared Ms. Benson’s tax return and brought up the idea. 

Ms. Benson could have contributed anywhere up to $7,000. For every $100 contributed, she would save $27.75 in taxes. “It’s more of a cash-flow question of whether you should or shouldn’t contribute,” Ms. Gordineer said.

Despite the benefits, many taxpayers are leaving money on the table. In tax year 2021, 85% of all U.S. households made no contributions to traditional IRAs or Roth IRAs, according to the Investment Company Institute.

Anyone with earned income can open an IRA. The limit on contributions to traditional IRAs and Roth IRAs is $6,000 for tax year 2022. Savers age 50 and older can contribute an additional $1,000. 

Maggy Fermo, a 30-year-old marketer in Fargo, N.D., didn’t give retirement savings much thought until she sat down in 2020 to go over her 2019 tax return with her tax preparer. 

“He candidly said, ‘What are you doing about retirement?’” she recalls.

Ms. Fermo had just left a job where she contributed the minimum to a workplace 401(k) retirement plan to get employer matching dollars, and was at a new employer that didn’t offer a retirement plan.

David Tolleth, a tax preparer and enrolled agent in Holmdel, N.J., helped Ms. Fermo open up a traditional IRA and rolled the 401(k) balance in. Then Ms. Fermo set up monthly contributions directly from her checking account into the IRA going forward.

“It was hard to start and get momentum,” Ms. Fermo said. 

At tax time, she’ll check that her contributions are on track for 2022 and 2023, she said. The limit on contributions to traditional IRAs and Roth IRAs jumps to $6,500 for tax year 2023, due to an inflation adjustment. The $1,000 catch-up amount isn’t adjusted for inflation.

Traditional IRA vs. Roth IRA

Many taxpayers choose a traditional IRA for the upfront tax break, Mr. Tolleth said. Contributions to traditional IRAs are often tax-deductible, but withdrawals years later in retirement are taxed at the same rates as ordinary income, like wages. 

By contrast, there is no deduction for contributions to a Roth IRA. But by making the contribution now, you’re setting yourself up for tax benefits that come later given withdrawals can be done tax-free. Eligibility to contribute to a Roth IRA directly is based on your income. For tax year 2022, the limits for most single filers begin at $129,000 and $204,000 for most married joint filers. 

Nondeductible IRAs

The April deadline offers an opportunity for taxpayers who don’t qualify for a deduction for a traditional IRA to top up their retirement savings by making after-tax, nondeductible contributions to a traditional IRA. The money grows tax-free, and only the earnings are taxable when you take withdrawals in retirement. Taxpayers who make these contributions need to keep track of how much they have contributed over time, said Mr. Tolleth. 

When to consider a backdoor Roth IRA

Taxpayers who earn too much to make contributions directly to a Roth IRA can still do so via a two-step process known as a backdoor Roth. First, contribute to a traditional nondeductible IRA. Then immediately move the money into a Roth IRA, pay any income tax on the earnings, and leave the money to grow tax-free.

Options for business owners or the self-employed

For taxpayers with self-employment income, SEP-IRAs have higher contribution limits than traditional IRAs: $61,000, plus an extra $6,500 for those age 50 and above, for tax year 2022. In many cases, savers can make contributions for 2022 until Oct. 16, 2023, if they have requested an extension to file their returns. 

“Many small-business owners put money back into their business and neglect saving for themselves,” said Ms. Gordineer. 

Save your tax refund

Mr. Tolleth encourages clients to consider using some or all of their tax refund to increase their retirement savings. You can include your retirement account routing information on your 1040 tax return. “It’s a subsidized retirement account. Why wouldn’t you?” he said.

This article was originally published in The Wall Street Journal on February 24, 2023, and written by Ashlea Ebling.


Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.