The tax deadline is swiftly approaching: are you in a panic about owing this year, or are you gunning for a refund?
If you’re worried you might owe taxes, there are a few ways you can limit your tax liability, such as claiming the student loan interest deduction.
But there’s another strategy you can use, whether or not you have student loan debt: maxing out your IRA. Didn’t contribute the maximum in 2015? It’s not too late – read on to learn how you can maximize your retirement savings and potentially reduce your tax liability for 2015 before the April deadline.
Maximum IRA contribution limits
While many tax-saving strategies must happen by December 31 of the current tax year, you can make IRA contributions – up to the maximum annual limit – until the tax filing deadline the following year.
That means, for example, you can continue making 2015 contributions to your IRA until April 18, 2016 (and if you live in Maine or Massachusetts, you get an extra day and have until the 19th).
But why should you?
Investing in a Traditional IRA can help you save money on taxes now. You may be able to deduct your contributions on your tax return and won’t pay taxes on your earnings until you withdraw the funds in retirement. Making the full annual contribution allows you to reap the maximum tax savings.
Keep in mind that a Roth IRA works a bit differently; your contributions are made with after-tax dollars and you will not be eligible for any tax deductions.
However, when you withdraw your funds in retirement, those withdrawals (including any interest earnings) will be made tax-free. Making the maximum annual contribution will increase your future potential earnings.
IRA maximum contribution for 2015-2016
The maximum IRA contribution for both Traditional and Roth IRAs in 2015 and 2016 is $5,500 ($6,500 if you’re age 50 or older). Remember, only contributions to a Traditional IRA are eligible for a tax deduction.
Here’s the thing — if you also have a retirement plan through work, such as a 401 (k), your deduction could be limited. For example, if your modified adjusted gross income (MAGI) is over $61,000, but less than $71,000, you’re only eligible for a partial deduction. If your MAGI exceeds $71,000 and you also have an employer-sponsored retirement account, you aren’t eligible for the deduction at all.
Don’t have a retirement plan at work? You’re in luck. You can deduct the full amount of your contribution limit. In other words, if you max out your retirement account and contribute $5,500, you may be able to deduct up to $5,500. Score!
How this strategy can help you
Managing your retirement savings while also paying off student loan debt can be tough, but it is possible. Even if you didn’t max out your retirement in 2015, you still have time to max out your IRA until the tax deadline this year.
As mentioned above, you can boost your retirement savings through a Roth IRA or Traditional IRA, up to the maximum IRA contribution. So let’s say you contributed $2,000 in 2015 — you’d be able to contribute an additional $3,500 this year up until the tax deadline. But if you want to get a tax deduction, it must be a Traditional IRA.
According to the tax experts at TurboTax, “If you qualify, a [Traditional] IRA contribution can be a great way to reduce this year’s taxes. For example, if you are in the 35 percent tax bracket and make a $5,500 contribution – the maximum amount for 2015 – you can save as much as $1,925 in taxes.”
Making previous year contributions
If you want to maximize your retirement savings this year and contribute up to the maximum IRA contribution, be sure to let your plan administrator know that your contribution should be attributed to 2015.
Typically, your contributions will be categorized under the year you made them, unless you specify otherwise, so it’s important to be clear that you want those particular funds to count for last year.
Should you max out your IRA?
If you’re focused on paying off your debt as soon as possible, you may wonder if it’s worth it to max out your IRA. If you will not be eligible for a tax deduction and getting out of debt is your number one priority, you probably shouldn’t bother.
I chose to aggressively pay off my student loans, so I decided to stop saving for retirement while I allocated all of my funds toward debt.
On the other hand, if you do max out your IRA, it could boost your retirement savings and offer you tax advantages in the form of a deduction now or tax-free withdrawals later.
If you do decide to contribute the maximum to your IRA, keep in mind that it’s better to make contributions sooner rather than later. According to Vanguard, there are more than double the number of contributions during this crunch before the tax deadline; investors who contribute last-minute will experience a “procrastination penalty” and miss out on compounding throughout the year.
In order to avoid this situation, consider setting up automatic contributions throughout the year. You’ll have more time to grow your nest egg and you’ll still reap the tax benefits.
But for now, if your goal is to max out your IRA for last year, you still have some time left.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
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