Last year may be history. But there may still be one thing you can do this week to reduce your 2021 tax bill (or bolster your refund), all while fattening your retirement savings.
You have until Monday, April 18 — the official federal tax-filing deadline — to make a 2021 IRA contribution of up to $6,000 ($7,000 if you’re 50 or older).
If you put that money into a traditional IRA, your contribution may be fully or partially deductible, regardless of whether you itemize deductions on your federal tax return.
A deduction for IRA contributions reduces your adjustable gross income, and therefore reduces your tax bill. If your AGI is $50,000, for example, a $5,000 deductible IRA contribution reduces it to $45,000.
Limits on how much of a deduction you may take
Adobe Stock
You have until Monday, April 18 -- the official federal tax-filing deadline -- to make a 2021 IRA contribution of up to $6,000 ($7,000 if you're 50 or older)
You can take a deduction for your full contribution if neither you nor your spouse are covered by a tax-advantaged retirement plan at work.
But if your employer does provide a 401(k), for example, the amount of your IRA contribution that you are allowed to deduct will depend on your income.
To be eligible for the full deduction your modified adjusted gross income must be $66,000 or less (or $105,000 or less if married filing jointly).
You will only get a partial deduction, however, if your modified AGI was over $66,000 but below $76,000 (or over $105,000 but below $125,000 for married joint filers).
Above those income levels, you may not deduct any of your traditional IRA contribution.
By contrast, contributions to a Roth IRA are never deductible under any circumstances, but can be withdrawn in retirement tax-free.
If your adjusted gross income is less than $66,000 and you make an IRA contribution — either to a traditional IRA or to a Roth IRA, you also may be eligible for a Saver’s Credit. That credit would reduce your tax bill or increase your refund dollar for dollar.
Tax break or not, however, if you didn’t save much for retirement during the calendar year, and are financially able to do so now, it’s worth making that move by April 18.
If you do make an IRA contribution of any kind, make sure to tell the financial institution where your account is housed to designate it as a 2021 contribution. That institution will send both you and the IRS Form 5498 confirming your contribution by the end of May. So be sure to keep that document with your other 2021 tax records, said Misty Erickson, tax content specialist at the National Association of Tax Professionals.
___
-
A last-minute way to reduce your 2021 taxes right up until Tax Day
You can’t forget to save if it’s automated. Whether it’s your 401(k) contribution taken pretax from your salary, or automatic transfers from your checking account into a savings account or money market account, automating will help you save without even thinking about it.
Lauren Zangardi Haynes, CIMA, certified financial planner at Spark Financial Advisors, says your employer may be able to also split your paycheck so it goes into both your checking account and a savings account.
“And then you can automatically transfer that money to an investment account, or to an IRA, or to a Roth IRA,” Zangardi Haynes says.
You can’t forget to save if it’s automated. Whether it’s your 401(k) contribution taken pretax from your salary, or automatic transfers from your checking account into a savings account or money market account, automating will help you save without even thinking about it.
Lauren Zangardi Haynes, CIMA, certified financial planner at Spark Financial Advisors, says your employer may be able to also split your paycheck so it goes into both your checking account and a savings account.
“And then you can automatically transfer that money to an investment account, or to an IRA, or to a Roth IRA,” Zangardi Haynes says.
-
A last-minute way to reduce your 2021 taxes right up until Tax Day
Review your savings account to make sure that you’re earning a competitive annual percentage yield, or APY.
It’s going to be difficult to keep up with inflation. But a high-yield savings account at a competitive bank is your best option for an emergency fund or other cash you might need on short notice.
Also, take a look at your checking account. If you’re incurring a monthly maintenance fee for going under a required minimum balance, you should be able to find a way to avoid that – whether through a low minimum balance checking account or by having a recurring direct deposit.
Compare savings accounts and checking accounts to make sure you’re maximizing yields and minimizing fees.
Review your savings account to make sure that you’re earning a competitive annual percentage yield, or APY.
It’s going to be difficult to keep up with inflation. But a high-yield savings account at a competitive bank is your best option for an emergency fund or other cash you might need on short notice.
Also, take a look at your checking account. If you’re incurring a monthly maintenance fee for going under a required minimum balance, you should be able to find a way to avoid that – whether through a low minimum balance checking account or by having a recurring direct deposit.
Compare savings accounts and checking accounts to make sure you’re maximizing yields and minimizing fees.
-
-
A last-minute way to reduce your 2021 taxes right up until Tax Day
If you have debt, make paying it off a priority. The interest you’re paying on a credit card is likely a lot more than what you’re earning on a savings account.
“If you have any credit card debt, you need to pay that off immediately without even considering anything else,” says Amy Hubble, CFA, certified financial planner at Radix Financial LLC.
The average purchase APR for all credit cards was around 16%, according to Bankrate data. Don’t count on credit card rates moving much lower. And they could move higher this year with the Fed planning on raising rates three times in 2022.
Paying off your debt and not running a balance are the only sure ways to avoid paying credit card interest.
If you have debt, make paying it off a priority. The interest you’re paying on a credit card is likely a lot more than what you’re earning on a savings account.
“If you have any credit card debt, you need to pay that off immediately without even considering anything else,” says Amy Hubble, CFA, certified financial planner at Radix Financial LLC.
The average purchase APR for all credit cards was around 16%, according to Bankrate data. Don’t count on credit card rates moving much lower. And they could move higher this year with the Fed planning on raising rates three times in 2022.
Paying off your debt and not running a balance are the only sure ways to avoid paying credit card interest.
-
A last-minute way to reduce your 2021 taxes right up until Tax Day
When you make your purchases, make sure you’re being rewarded for them with cash back.
Weigh whether you’d be better off earning more cash back with a credit card that has an annual fee but higher cash-back rewards, or a no-annual-fee card that has a lower cash-back percentage.
Most bank debit cards don’t let you earn cash back. So in most cases, using a credit card for purchases is going to help you save money throughout the year. Credit card companies will often let you apply cash back toward your balance or some may let you directly transfer it to your checking account.
There’s more to it than just choosing the right card.
Credit card shopping portals are also places where you can potentially maximize your cash back. By going through your credit card’s website or through a site such as Rakuten, you can earn cash back in addition to what you earn on your cash-back credit card.
When you make your purchases, make sure you’re being rewarded for them with cash back.
Weigh whether you’d be better off earning more cash back with a credit card that has an annual fee but higher cash-back rewards, or a no-annual-fee card that has a lower cash-back percentage.
Most bank debit cards don’t let you earn cash back. So in most cases, using a credit card for purchases is going to help you save money throughout the year. Credit card companies will often let you apply cash back toward your balance or some may let you directly transfer it to your checking account.
There’s more to it than just choosing the right card.
Credit card shopping portals are also places where you can potentially maximize your cash back. By going through your credit card’s website or through a site such as Rakuten, you can earn cash back in addition to what you earn on your cash-back credit card.
-
-
A last-minute way to reduce your 2021 taxes right up until Tax Day
Check that you’re not overpaying or paying for monthly items that aren’t being used. Go through your budget — or monthly expenses if you don’t have a budget.
It’s easy to start a budget, and it can help you maximize your savings. See if there are areas of opportunity, such as cutting back on dining out or on coffee or other spending, that adds up over time. Also, go through your budget and try to renegotiate items, Crystal Rau, certified financial planner at Beyond Balanced Financial Planning, says.
“I check our insurance just to make sure we’re still getting the best rate for the coverages that we’re carrying,” Rau says. “It’s just about doing a reset every year, just to make sure you’re getting the best deal and you’re taking advantage of all those things that are offered to you.”
Check that you’re not overpaying or paying for monthly items that aren’t being used. Go through your budget — or monthly expenses if you don’t have a budget.
It’s easy to start a budget, and it can help you maximize your savings. See if there are areas of opportunity, such as cutting back on dining out or on coffee or other spending, that adds up over time. Also, go through your budget and try to renegotiate items, Crystal Rau, certified financial planner at Beyond Balanced Financial Planning, says.
“I check our insurance just to make sure we’re still getting the best rate for the coverages that we’re carrying,” Rau says. “It’s just about doing a reset every year, just to make sure you’re getting the best deal and you’re taking advantage of all those things that are offered to you.”
-
A last-minute way to reduce your 2021 taxes right up until Tax Day
You may be able to adjust some employee benefits options outside of open enrollment, such as how much you contribute to your employer-sponsored retirement plan, like a 401(k).
Adjusting your withholding for taxes or how much you’re putting away for retirement — which may reduce your taxable income — is a way to potentially save money, Rau says. Consult with a tax adviser to make sure that your strategy makes sense to save money on taxes.
You may be able to adjust some employee benefits options outside of open enrollment, such as how much you contribute to your employer-sponsored retirement plan, like a 401(k).
Adjusting your withholding for taxes or how much you’re putting away for retirement — which may reduce your taxable income — is a way to potentially save money, Rau says. Consult with a tax adviser to make sure that your strategy makes sense to save money on taxes.
