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High salary? The traditional benefits of IRA 2021 have gotten a little softer

If you’ve made too much money to contribute to a Roth IRA, you can still put money aside in a Traditional IRA. It’s another tax-efficient account that offers perks you can use right away, especially since rising income brackets in 2021 have made this retirement gem even more appetizing. Having a higher income now means that you are in a great position to prepare for a fantastic retirement and take advantage of immediate tax savings not available to Roth IRA contributors.

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Instant benefits at your fingertips

Any smart investor is always looking for incentives that can lower their annual tax bill. For many, these benefits begin and end with tax breaks based on contributions to the workplace retirement savings plan, often a 401 (k) or 403 (b). But don’t sell yourself short. If you have a high income, the traditional IRA adds additional features to your tax planning strategy that can accelerate your retirement goals. You can open and fund your account with tax-exempt contributions (you’ll pay taxes on the money later), invest in a wider range of assets, and possibly deduct your contributions from your tax return, even if you are lucky enough to have a workplace pension plan.

Anyone can contribute to a Traditional IRA, regardless of their income status. As long as you earn money, you can contribute to an IRA. While the Roth IRA is known for its strict income limits which exclude the highest incomes, you don’t have to worry about these restrictions with the traditional IRA.

When tax time comes, you’ll be glad you contributed to a Traditional IRA because the tax savings are too great to refuse. If you contribute $ 5,000 to a Traditional IRA, you withdraw $ 5,000 from your income calculation, thus avoiding taxes on that amount until a later date. Your $ 5,000 investment can grow without worrying about paying taxes every year.

Every good thing has its limits

A traditional IRA is very attractive because it gives you the flexibility to contribute at any level of income; however, you can only make a maximum contribution of $ 6,000 if you are under 50 ($ 7,000 for people 50 and over). You should also keep in mind that you will not be able to make tax-deductible contributions if you or your spouse is covered by an occupational pension plan and you exceed the income limits.

Fortunately, all of your contributions are tax deductible if you are single or the head of a household earning less than $ 66,000 or filing a joint return earning less than $ 105,000. As soon as your income exceeds these limits, you enter the danger zone – more commonly known as the “phase-out range”. This means that your contributions to your traditional IRA are subject to a reduced deduction on your tax return. Once you exceed the higher amount of the phase-out range, you can no longer make a tax-deductible contribution to a traditional IRA; However, you can still make a non-deductible contribution to allow your investments to grow tax-free, defer taxes on earnings, or make a Roth IRA contribution through the backdoor.

Traditional IRA Income Phase-Out Ranges

Income tax return status

Income range 2021

Income range 2020

Single filers and heads of families covered by an occupational pension scheme

$ 66,000 to $ 76,000

$ 65,000 to $ 75,000

Joint deposit covered by an occupational pension scheme

$ 105,000 to $ 125,000

$ 104,000 to $ 124,000

Joint filing, where one of the spouses is not covered by a workplace pension plan

$ 198,000 to $ 208,000

$ 196,000 to $ 206,000

Married filing separately from filers covered by an occupational pension scheme

$ 0 to $ 10,000

$ 0 to $ 10,000

Data source: IRS.

The good news: If you or your spouse are not covered by an occupational pension plan like 401 (k) or 403 (b), these income limits do not apply. All of your contributions that you make to a Traditional IRA are tax deductible and can save you money during tax season.

Don’t get carried away by contributions

As alluring as the traditional IRA tax benefits are, make sure you don’t contribute more than the amount allowed or you could face 6% overcontribution penalties – this can add up as it applies. for each year, the additional funds remain in your retirement plan. You don’t want to waste your hard-earned retirement money, so be sure to review the annual IRA contribution limits.

As long as you follow the rules, the Traditional IRA becomes a real treasure trove when you are in your prime earning years. You will not be taxed until you receive distributions in retirement and can enjoy the tax savings now. Because income ranges have been widened for 2021, even more people will be able to make tax-deductible contributions, creating a way to keep more money in your pocket and invest in your favorite stocks as we cruise. in the uncertainties to come.