IRA and SEP IRA can reduce taxes for 2024

1. Traditional IRA

Contributing to a traditional individual retirement account (IRA) is a powerful strategy to save for your future while reducing your taxable income for 2024.

If you qualify, traditional IRAs provide an upfront tax deduction on contributions, enabling your earnings to grow tax-deferred. In 2024, you can contribute up to $7,000, with an additional $1,000 for those 50 or older. You have until Tax Day in 2025 to make these contributions.

Pre-tax contributions to a traditional IRA can lower your taxable income, potentially placing you in a lower tax bracket—this can lead to significant tax savings, especially between the 22% and 12% brackets.

While a Roth IRA won’t reduce your taxes now, it can offer tax-free withdrawals in retirement. It may be suitable if you expect to be in a higher tax bracket later, though be aware of contribution income limits.

If you don’t qualify for traditional IRA contributions and exceed Roth limits, consider a “backdoor Roth” to help you maximize your retirement savings.

2. SEP IRA, if you’re self-employed

As a small business owner, you may qualify for a traditional IRA, a Roth IRA, or a Simplified Employee Pension (SEP IRA) if you meet certain requirements.

Under the SECURE 2.0 Act, you can contribute to SEP IRAs with either pre-tax or after-tax dollars. In 2024, self-employed individuals can set aside up to 20% of their net income, with a maximum of $69,000. If you have employees, you can contribute up to 25% of their compensation, up to the same limit.

Contributions must be made by the due date of your tax return, including any extensions, in 2024.

RJC

November 20, 2024