If you haven’t already funded your retirement account for 2014, do so by April 15, 2015. That’s the deadline for contributions to a traditional IRA, deductible or not, and to a Roth IRA. However, if you have a Keogh or SEP and you get a filing extension to October 15, 2015, you can wait until then to put 2014 contributions into those accounts. To start tax-free compounding as quickly as possible, however, don’t dawdle in making contributions.
Making a deductible contribution will help you lower your tax bill this year. Plus, your contributions will compound tax-deferred. It’s hard to find a better deal. If you put away $5,000 a year for 20 years in an investment with an average annual 8 percent return, your $100,000 in contributions will grow to $247,000. The same investment in a taxable account would grow to only about $194,000 if you’re in the 25 percent federal tax bracket (and even less if you live in a state with a state income tax to bite into your return).
To qualify for the full annual IRA deduction in 2014, you must either: 1) not be eligible to participate in a company retirement plan, or 2) if you are eligible, you must have adjusted gross income of $60,000 or less for singles, or $96,000 or less for married couples filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible as long as your combined gross income does not exceed $181,000.
For 2014, the maximum IRA contribution you can make is $5,500 ($6,500 if you are age 50 or older by the end of the year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2014 is $52,000.
Although choosing to contribute to a Roth IRA instead of a traditional IRA will not cut your 2014 tax bill—Roth contributions are not deductible—it could be the better choice because all withdrawals from a Roth can be tax-free in retirement. Withdrawals from a traditional IRA are fully taxable in retirement. To contribute the full $5,500 ($6,500 if you are age 50 or older by the end of 2014) to a Roth IRA, you must earn $114,000 or less a year if you are single or $181,000 if you’re married and file a joint return.
The amount you save for making a contribution will vary. If you are in the 25 percent tax bracket and make a deductible IRA contribution of $5,500, you will save $1,375 in taxes the first year. Over time, future contributions will save you thousands, depending on your contribution, income tax bracket, and the number of years you keep the money invested.