If you’re putting off doing your taxes because you’re afraid you might be getting back less than you expect or, worse yet, owe more than you paid, you should know that there’s one thing you can do right up to the last minute on April 15 to help substantially reduce the bill: contribute to an investment retirement account (IRA). Years from now, you’ll thank your younger self for making a wise move. 

Traditional IRA

There are two major types of IRAs: the “traditional” and the Roth IRA. But if you need to bail out of a problem at tax time, only the traditional IRA can help.

That’s because the amount you invest in a traditional IRA is subtracted from your taxable income for that year. As far as the IRS is concerned, your income for the year shrank by that amount. Of course, it disappeared from your pocket, too, but at least you’ll get your money back, plus earnings, after you retire. And the IRS will get its share when you withdraw the money.

Say you’re a single person who earned $50,000 in taxable income last year. The 2018 tax table says you owe 22% of that, or $11,000. But if you contribute $5,000 to an IRA, your taxable earnings drop to $45,000. You now owe $9,900, reducing your tax bill by $1,100. And you can make that 2018 contribution as late as April 15, 2019.

Almost anyone who has earned income and is under age 70½ by the end of the year is eligible to invest in a traditional IRA. Admittedly, the tax deductions can be limited for people who are already getting a tax break through an employer’s retirement plan. ​Increasingly, though, many of us don’t have a company retirement plan – about 35% of private-sector workers, according to The Pew Charitable Trusts' analysis of the 2012 Census Bureau Survey of Income and Plan Participation data.

In fact, some of us don't have the kind of full-time salaried job that makes our incomes predictable, and our taxes foolproof, from year to year. About 53 million Americans, or a third of all workers, now identify themselves as “freelancers,” according to a study by the Freelancers Union. They are independent contractors, or they “moonlight” after their regular jobs, or jump from one project to the next in a series of short-term contracts. Part or all of their income may be paid with no taxes withheld, making it easy for them to land in the soup at tax time. That’s where a traditional IRA can help.

Roth IRA 

If you’re not in a crunch over this year’s tax bill, you might consider a Roth IRA instead. The main difference lies in the tax treatment of your contribution the year you contribute it.

Your contribution to a traditional IRA is in “pre-tax” dollars. As noted, it reduces your taxable income for the year. After retirement, you usually owe taxes on all of the money that you withdraw, both the original dollars paid in and the investment income it earned.

In contrast, a Roth IRA requires payment in “post-tax” dollars. You pay taxes on the income before you make a deposit, and get no immediate tax benefit. But after you retire, your entire nest egg is tax-free, including the investment income. 

IRA contributions aren't limited by age, but they can be by income, which you can determine based on the IRS worksheet. Basically, contributions start getting phased out for modified adjusted gross incomes above $193,000 for couples and $122,000 for singles in 2019. 

Both types of IRA are intended as long-term retirement savings funds. There is a tax penalty, usually 10%, for withdrawing the money before you reach the age of 59½ with a traditional IRA. With a Roth, you can withdraw the equivalent of your contributions at any time, but you pay taxes and penalties on earnings (that is, any sums above the amount you originally contributed) on a sliding scale, depending on your age and how long you've held the account.

So, whether you are considering this at your leisure or grabbing a last chance tax break, keep in mind that the real purpose of your IRA is preparing for a financially comfortable retirement. 

IRA Contribution Limits

There is a limit to how much you can contribute to a traditional IRA annually. For tax year 2018, the limit is $5,500 for people under age 50, and $6,500 for those 50 and over, or 100% of employment income, whichever is less. It goes up by $1,000 for 2019.

Married people filing jointly can double those numbers. Even if one spouse is not employed or has very little income, a measure called the Kay Bailey Hutchison Spousal IRA Limit allows a married couple to jointly contribute $11,000 for 2018. (It’s $12,000 if one of the pairs is at least age 50, and $13,000 if both are 50 or older.) 

Where to Open an IRA

You can set up an IRA at almost any bank, brokerage, mutual fund company or other financial institution. Some tax preparers may even offer one (probably not the best option, though). All it takes is your signature on the paperwork and a check for your first contribution. 

You can also take care of most of the details, including future contributions and changes, online. In fact, Online brokerages have eclipsed traditional brokerages to become the primary way people sign up for new accounts. The best brokers for IRAs and Roth IRAs have user-friendly interfaces and helpful educational materials to make opening and maintaining an account easier than ever. 

Considerations When Choosing an IRA Provider

When picking a place for your account, consider the fees and costs attached to the IRA. As with any investment, there are trading fees, and they can vary widely. You need to be wary of gratuitous charges that eat away at your money, like “maintenance” fees or “custodial” fees. On the other hand, some companies offer special deals for new accounts. Check whether a custodian you’re considering is offering an incentive for your business.  

In addition, consider the options they offer for your investment. Your IRA money can be invested in mutual funds, bonds or individual stocks. You can choose risky “growth” funds or slow-growing but safe money market funds. Best of all, you can spread your money around, mixing conservative and risky choices. You’ll get the usual quarterly statements, though you can check the progress of your investments online anytime.

You can change your mind about how your money is invested at any time, and you probably should periodically. Investment advisers urge people to take some risks when they’re young and get more cautious as they get closer to retirement.

The Bottom Line

Right about now, you may be feeling that you don't have enough time to do this properly. Think of it this way: You could solve an immediate tax problem by opening an IRA by April 15. That’s a first step that could change your life all the way down the road.

Once tax time is over, you can consider your many options. You can change your investment choices or even switch providers altogether if you find a better deal. Best of all, you can set up automated payments to add to your new IRA regularly so that you get the tax break every year and the long-term financial benefits in the future.

Your IRA may begin as an emergency fix for an immediate problem. But, hopefully, you will continue to contribute to it from year to year, making your tax bill smaller and your retirement account bigger every year of your working life.