While 2023 is over and the 2024 tax filing season is here, did you know you can still get a tax deduction for retirement savings in the 2023 tax year?

Many tax planning strategies must be implemented before the end of the year. However, you can make contributions to IRAs and SEP-IRAs after the end of the year and still claim a tax deduction for the prior year. This helps you progress toward your retirement goals and may reduce the taxable income on last year’s return.

So, let’s dig into these options and help you optimize your contributions.

IRA contributions can be made until April 15

You can contribute to a traditional IRA or Roth IRA until the tax filing deadline, April 15, 2024, for the 2023 tax year.

For 2023, the contribution limit is $6,500, with additional catch-up contributions of $1,000 for those aged 50 and above.

Contributions to a Traditional IRA can reduce your taxable income for 2023, lowering your tax bill. However, the deductibility depends on your income and whether you or your spouse are covered by a retirement plan at work.

If you (and your spouse, if married) aren’t covered by a retirement plan at work, then your deduction isn’t limited. However, if you are covered by an employer-sponsored retirement plan, you must have an adjusted gross income (AGI) of $73,000 or less in 2023 to fully deduct your contribution ($116,000 or less if you’re married and file a joint return.

Check out the Internal Revenue Service (IRS) table with IRA deduction limits to see how much of your deduction you’ll lose if your AGI is over those limits.

Roth IRA contributions aren’t deductible

The deadline to contribute to a Roth IRA is the same: April 15th. Roth IRA contributions are also capped at $6,500 for 2023, with the same catch-up provision. However, unlike Traditional IRAs, Roth IRA contributions are not tax-deductible. The benefit lies in future tax savings: withdrawals in retirement are tax-free, provided you’ve had the account for at least five years and are at least 59 1/2 years old.

Also, remember that you may not be eligible to contribute to a Roth IRA if your taxable income is too high. For 2023, your modified AGI must be $138,000 or less to contribute the full amount ($218,000 if married filing jointly).

Above those limits, your maximum contribution is phased out or eliminated entirely. Check out the Internal Revenue Service Roth IRA contribution limit table for more details or if you use another filing status.

SEP-IRAs: For the self-employed and small business owners

For self-employed people, a SEP-IRA allows for significantly higher contributions—up to 25% of compensation or $66,000 for 2023, whichever is less.

The deadline to set up and contribute to a SEP-IRA is the due date (including extensions) of your business’s income tax return for that year. This means if you file an extension for your 2023 tax return, you have until either September 15, 2024, if you file a partnership, LLC, or S corporation return or October 15, if you file your business taxes on Schedule C attached to your Form 1040 or have a C corporation.

Contributions to a SEP-IRA are tax-deductible, reducing your taxable income for the year. This can be a substantial tax break for self-employed individuals and small business owners.

401(k) Plans: Contributions must be made by year-end

If you’re covered by a 401(k) plan at work or have a Solo 401(k) as a business owner, the deadline to make contributions for 2023 has passed. You have until December 31 to contribute to a 401(k) plan.

A 401(k) plan is funded with pretax contributions, meaning they reduce your taxable income for the year. Taxes on these contributions and their earnings are deferred until withdrawal in retirement.

While you may have missed last year’s 401(k) deadline, it’s not too early to start planning for next year. The contribution limit for 2024 is $23,000. If you’re 50 or older, you can make an additional catch-up contribution of $7,000, bringing your total contribution limit to $30,000.

Making the most of your contributions

If you’re ready to contribute to your retirement accounts for 2024, here’s how to do it.

• Assess your financial situation. Consider your current tax bracket, expected future income, and retirement plans. This will help you decide between a traditional IRA versus a Roth IRA.
• Understand the contribution limits. Be aware of the contribution limits and deadlines. You can contribute to both a Traditional and a Roth IRA in the same year, but the total contribution must not exceed the annual limit. You can usually make contributions online by logging into your account. When you do, make sure you select the right year to apply your contributions to—2023, in this case.
• Consider a SEP-IRA. If you’re self-employed or own a small business, a SEP-IRA offers higher contribution limits (and thus bigger potential tax deductions).
• Automate contributions. Setting up automatic deductions from your paycheck into your SEP-IRA or 401(k) can ensure consistent contributions throughout the year and help you avoid missing the contribution deadline.

Get professional tax planning help

Contributing to your retirement account can be an excellent way to reduce your tax bill while securing your financial future. Whether you have a Traditional IRA, Roth IRA, or SEP-IRA, each has unique advantages and rules.

If you need help deciding which type of account is right for you or whether a contribution will result in a lower tax bill, contact NewWay Accounting. We can walk you through your options and help you maximize your total contributions to enjoy a more comfortable retirement. Remember, the key is to start early, contribute regularly, and stay informed about the tax deadlines and contribution limits.