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How an IRA could save you big under the new tax plan

An IRA is now one of the few ways you can potentially lower your taxes while taking the standard deduction

The new tax law brings big changes for virtually all U.S. taxpayers. New tax brackets, a higher standard deduction and no more personal exemptions are all examples of a changing tax landscape . Although there haven’t been many major changes to IRA-related rules, shifts in other tax rules could make an IRA income adjustment a smart move for some people. Are you one of them?

Tax bracket magic

If your income is near a tax bracket threshold, an IRA deduction can help keep you out of that higher bracket. Looking at the new brackets, there’s a big jump in the tax rate at $77,400 for joint filers—income over that amount is taxed at 22%, but income under that amount is taxed at just 12%. The more income you can move out of the higher bracket, the better off you are. It’s like saving an extra ten percent on every dollar.

The IRA adjustment may feel a little less ideal for single filers, with the 22% bracket kicking in for income over $38,700 and hitting 24% for income over $82,500. But remember, if eligible, the money you put into your IRA isn’t taxed as income until you withdraw it. Therefore, you’re saving big on taxes with your contribution, even if you don’t get the satisfaction of avoiding a higher tax bracket.

Get an adjustment without itemizing

The new tax rules increase the standard deduction and eliminate the personal exemption. For 2018, the standard deduction is $12,700 for individuals and $24,000 for joint filers. These higher standard deductions mean that fewer people will be itemizing their taxes for 2018—and you could be one of those people. Does switching from itemizing to the standard deduction make an IRA contribution less valuable? No!

Here’s why: you can deduct the amount you contribute to your IRA and take the standard deduction on your taxes. That’s because it’s one of the few deductions that you can use to adjust your income, even if you don’t itemize deductions. An IRA is now one of the few ways you can potentially lower your taxes while taking the standard deduction.

Of course, IRAs aren’t just a way to save on taxes—they can also be a great way to save for retirement. Talk to a certified tax professional to see if any of these benefits may apply to you, and learn more about all of the possibilities with your IRA using this resource from the IRS.