Retirement Plans And How They Affect Your Tax Return

Whether you are a tradesman, skilled laborer, or sell other goods and services, one of the biggest questions taxpayers have is how retirement plans affect your tax return. We all know taxes can be complicated, so breaking down retirement plans and their tax implications can make understanding the process easier. In this article, we will discuss how different retirement plans affect your tax return. 

Traditional IRA

Many people have traditional IRAs as their retirement plans. If you are not covered by a retirement plan at work, the biggest benefit of making contributions to a traditional IRA is the contributions are tax deductible. 

The contribution limits for all your IRA accounts for 2023 is $6,500, up from $6,000 in 2022. Additionally, your filing status is another way retirement plans affect your tax return.

For example, suppose you have a real estate agent. Their tax filing status is single, and they are not covered by a retirement plan at work. The real estate agent can take the full IRA deduction.

This could change if the taxpayers filing status changes. Here is a quick summary of how filing status affects your tax return:

• Married filing jointly where neither spouse is covered by a workplace retirement plan:
  No phase out - you get to take the full deduction!

• Single taxpayer who is covered by a workplace retirement plan:
  The deduction is phased out between $68,000 to $78,000 for 2022 and $73,000 to $83,000 for 2023.

• Married filing jointly taxpayer with a spouse who is covered by a workplace retirement plan:
  The deduction is phased out between $109,000 to $129,000 for 2022 and $116,000 to $136,000 for 2023.

• Married filing separately taxpayer who is covered by a workplace retirement plan:
  The deduction is phased out between $0 and $10,000 for both 2022 and 2023.

If you would like more information and details on these limits, be sure to check out the IRS information page here.

You might be wondering about how employer sponsored retirement plans affect your tax return. For employer sponsored IRA accounts, your employer has already deducted the amount of your retirement contributions from your income. 

Once you receive your W-2, simply enter the information exactly as it appears and you will arrive at the correct number. 

Roth IRA

Roth IRAs are becoming more popular for many people. Roth retirement plans are different from traditional IRAs in that initial contributions to a Roth IRA are not tax deductible.

Instead, when a worker makes withdrawals from their Roth IRA, the withdrawals are not taxed. This feature is attractive to those who start contributing early hoping that their contributions will lead to retirement account growth over time.  

401(k)

Let’s discuss how a 401(k) retirement plan affects your tax return. 401(k) contributions are made with pre-tax income, which makes them a great tool to plan for the future while also reducing your present tax bill. 

Withdrawals from a 401(k) plan are taxed as if they are ordinary income. The age requirement for making penalty free withdrawals is 59.5 years old. 

What about contribution limits? The contribution limit to 401(k) plans is $20,500 for 2022 and $22,500 for 2023.

Pension Plan

Pension plans may not be as prevalent as in the past, but are still in use by many employers. Pension retirement plans affect your tax return, so let's look at them closer.

Contributions to traditional pension plans are tax-free, and withdrawals can be taken penalty-free after 59.5 years old. 

Once you start receiving pension payments you typically pay regular income taxes on these payments. Most pension plans sponsors make the proper withholdings before sending the check, so you won’t need to worry about that. 

Saver’s Credit

Another way retirement plans affect your tax return is with the Saver’s Credit. The Saver’s Credit is offered to taxpayers of certain income thresholds to encourage saving for retirement. The amount of credit can be either 50%, 20%, or 10% of your retirement contributions depending on filing status and adjusted gross income. 

For example, say a worker with an adjusted gross income of $40,000 in 2022. He contributed $2,000 to his IRA during the year. This worker is eligible for a $1,000 tax credit based on the Saver’s Credit guidelines.

For more information on income limits and credit rates, check out the IRS webpage on the Saver's Credit.

When Can You Contribute?

Dates of contributions for your retirement plans depend on the type of plan. If you have an IRA account you can open and fund it until the original due date of the tax return, which is April 18th for 2023.  

401(k) plans require contributions to be made by December 31st of the previous year. 

For example, let’s say you decide to open a retirement account on April 1st, 2023. You can open and fund an IRA and claim a deduction for the 2022 tax year on April 1st, but it is too late with his contributions if he wants a 401(k).

Summary 

We hope this article has helped clarify how different retirement plans affect your tax return. The topic can be complicated, but we can help guide you in the right direction with your retirement account decisions.