MAY: Pay the Government or Pay Yourself
Now that you have filed your taxes (or about to!), you might realize you need to make some adjustments. If you ended up owing a lot, when you filed your taxes, your options were to pay the taxes, or to decrease your taxes by contributing to a traditional IRA. There are two ways to look at these options: Pay the government or pay yourself. Coming up with a lump-sum contribution to an IRA to lower your taxes might not have worked into your budget. There are ways to approach this situation prior to next year’s tax filing deadline so that you are not caught with the same problem next year.
Pay the government: You can increase your tax withholding on your paycheck by decreasing the number of personal allowances on your W-4. If you got a huge refund, you may want to increase the number of personal allowances on your W-4 so that less money is withheld on each paycheck. Contact your HR department at work on how to make the changes to your withholdings.
Pay yourself: A lump-sum contribution to an IRA is just one way to set up an IRA. You can also contribute to an IRA on a monthly, semi-monthly, quarterly, and semi-annual basis depending on the IRA custodian. By setting up period contributions, which some custodians allow for as low as $50, you can budget your IRA (or Roth IRA) contributions throughout the year. For example, if a $1,500 IRA would have helped you out this past tax filing year, then you could contribute $100/mth and then add the difference when you do your taxes. You have until tax filing deadline to make contributions for the previous tax year. Monthly contributions, made by drafts from your checking or savings account, are credited to the tax year that they are made. Many custodians are flexible in that you can change your contribution amount at any time, or even make one-time additional drafts when your budget permits.