One under-the-radar move can cut your tax bill and boost your retirement savings


Almost a third of investors (31%) wish they had started saving for retirement sooner, according to a poll from Magnify Money. While you can't go back in time, if you have a little extra money in your budget right now, you can make a smart tax move that may let you reduce your 2019 taxes in two ways — while also boosting your retirement savings.

To take advantage, it helps to understand two tax breaks: so-called prior-year IRA contributions, and the retirement saver's credit. Here's what you need to know.

You can still make a deductible IRA contribution for 2019

One-quarter of Americans don't know it's legal to make a prior-year contribution to your IRA, according to a 2019 Nerd Wallet survey of over 2,000 U.S. adults. But it is: You have until the April tax deadline to fund your IRA for the previous tax year, Richard Stumpf, a certified financial planner at Financial Benefits Inc., in Wichita, Kansas, told Grow earlier this year.

In other words, you have until April 15, 2020, to make your 2019 contribution, up to last year's limit of $6,000. Just be sure to tell your financial institution that you want the money to count for 2019, rather than 2020.

Depending on how much you earn and whether you have access to a workplace retirement plan, your contributions to a traditional IRA may be tax-deductible. For a married couple earning $50,000 (putting them in the 22% tax bracket) a $2,000 contribution could save about $440 in federal taxes.

Tax credits vs deductions: Here's the difference

Video by Stephen Parkhurst

Your 2019 retirement savings may qualify for a tax credit, too

Whether you were saving for retirement diligently throughout 2019 or are taking advantage of that prior-year IRA loophole, there's another retirement-related tax break to consider. Low- to moderate-income taxpayers may qualify to claim the retirement savings contributions tax credit, also known as the saver's credit.

"It is meant to be an incentive to plan for retirement," says April Walker, the American Institute of CPAs' lead manager for tax practice & ethics. "Planning for retirement is an important part of any financial plan."

Depending on your adjusted gross income, the saver's credit is worth up to 50% of the first $2,000 of your contribution to qualified retirement accounts including a 401(k) or IRA. That means the maximum credit you may be eligible for is $1,000. If you're married filing jointly, the maximum credit is $2,000 on up to $4,000 in contributions.

The value of the credit starts to phase out for taxpayers who earned more than $19,250 in 2019 ($38,500 for married couples). And you aren't eligible if you earn more than $32,000 ($64,000 for married couples).

Tax credits reduce your tax bill dollar-for-dollar, so this can be a valuable break. For a married couple earning $50,000, a $2,000 contribution could qualify for a credit worth $200.

Even if you don't see much of an immediate benefit in the form of tax breaks, the real payoff is the growth of your retirement contributions over your career, especially if you're starting early.

By Grow's calculations, you'd need annual contributions of just $4,550 over a 40-year career to become a 401(k) millionaire — although depending on your retirement goals, you may need even more than that. If you give your money time to grow and compound now, you're setting yourself up to retire comfortably and achieve your money goals.

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