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How To Reduce Your Tax Bill, Save For Retirement and Save the World

…all in one move.

Want to reduce your tax bill?

Tax time is just around the corner. One of the smartest moves you can make before April 17th to reduce your tax bill is to open a socially responsible traditional IRA. In one update you’ll reduce your tax bill, save for retirement and make impact investments that address global challenges, all while generating returns. Why a traditional IRA? It gives you tax advantages now vs later.

Comparison of Traditional v Roth IRA

*Don’t withdraw money before age 59½ because you’ll be taxed on the gains and you’ll pay a 10% penalty. There are exceptions.

**Roth IRA qualified distributions are tax-free if the account is at least 5 years old and the distributions are either taken at age 59½, upon death, upon disability or as a first homebuyer up to $10,000. Nonqualified distributions of accumulated income are taxed at ordinary rates. Same early withdrawal penalties apply.

Related: Turn Your Side Gig into a Tax Cut

How to Reduce your Tax Bill

Here are three easy steps you can implement today to reduce your 2017 tax bill.

1. Open a Traditional IRA

When you contribute to traditional IRA, your contributions are pre-tax. This means that you can deduct the amount of your contribution from your income, thereby reducing your tax bill now. You won’t pay taxes on your savings and earnings until you withdraw the money in retirement.

2. Allocate your contributions to 2017

If you open a traditional IRA before April 17th, allocate those contributions to 2017. This means you can deduct up to $5,500 off of your adjusted gross income before your tax is calculated ($6,500 if you are over 50). These contributions will decrease the amount of income you are taxed on for 2017 and, therefore, reduce your tax bill.

3. Even better, invest for a better world

Two of our favorite socially responsible investment platforms both offer traditional IRAs. Aspiration Bank and Swell Investing have traditional IRAs that enable you to save for your future, save money on your taxes and save the planet.

Table comparing Swell and Aspiration sustainable investing options

Aspiration

The Aspiration Redwood Fund is a fossil fuel-free mutual fund that uses Environmental, Social and Governance (ESG) criteria to invest in sustainable businesses.

pyramid showing impact investing (top - most rigorous), SRI and ESG investing at the base.

ESG investing excludes companies that harm the environment (e.g. oil & gas, tobacco, firearms). Top of pyramid: Impact Investing looks for companies with specific and measurable goals (e.g. renewable energy and zero waste).

  • Lets you invest in sustainable companies. These are based on ESG (Environmental, Social and Governance) factors. 
  • Only requires $100 to start
  • Has no account or custodial fees, (which can normally be an average of $25 to $50 each year)
  • Allows you to pay Aspiration whatever you think is fair
  • Caps 3rd party fees at .5%

Swell Investing

Swell’s IRA uses SMAs (Separately Managed Accounts) for investors to create a customized impact portfolio of companies, across a variety of themes. These socially responsible portfolios are all based on Swell’s rigorous criteria for performance and impact.

What we like about Swell: you legally own the companies listed in their portfolio. By comparison, investments in mutual funds and ETFs are actually investments in an organization which, in turn, owns the securities in the fund.

Swell investors can choose from 6 different themes today. Cool feature: you get to exclude up to 3 companies if you don’t want them in your final portfolio:  

  • Green Technology – Think electric cars and LED lights.
  • Renewable Energy – Think wind turbines and solar panels.
  • Zero Waste  – Think recycling and repurposing.
  • Clean Water  – Think water filters and pipe repairs.
  • Disease Eradication  – Think immunizations and research.
  • Healthy Living – Think nutritious foods and health centers.

Related:  Start Impact Investing for as Little as $50

Invest for a Better World without Giving Up Returns

You might be wondering: will investing for good mean that I’ll have to give up returns? The answer is no. You don’t have to give up profit for purpose or value for values. There are multiple studies showing that investing for a better world performs just as well (if not better) than regular index investing. Here’s a chart showing the MSCI KLD Index (a long standing socially responsible index) vs the S&P 500.

Chart of SP500 v MSCI KLD Social Index over 25 years

Related:  Growth And Wellness for Everyone:  Aspiration’s Investment Products

Even More Ways to Save on Taxes

If you’re already covered by an employer’s retirement plan, the ability to deduct your IRA contributions on your tax return depends on your income. Here are some guidelines for 2017.

A. If you are covered by your employer’s retirement plan

If you’re covered by an employer’s retirement plan, such as a 401K, check out the adjusted gross income ranges by your filing status in the table below. Is your adjusted gross income less than the lower income amount in the range below?  If so, you can deduct the full amount of your traditional IRA contributions.

Is your adjusted gross income more than the higher income amount in the range below?  If so, you can’t deduct any traditional IRA contributions. If your adjusted gross income is within the lower and higher income range, you can take a partial deduction.

Tax Filing Status 2017 Tax Year
Single or Head of Household $62,000-$72,000
Married Filing Jointly $99,000-$119,000
Married Filing Separately $0-$10,000

Related: Take Control of your 401K

B. If you are not covered by your employer’s retirement plan

If you’re not covered by an employer’s retirement plan, you can take the full IRA deduction unless your spouse is covered by a retirement plan.

Tax Filing Status 2017 Tax Year
Single No Limits
Married Filing Jointly
(spouse has no employer retirement plan)
No Limits
Married Filing Jointly
(spouse has employer retirement plan)
$186,000-$196,000
Married Filing Separately
(spouse has employer retirement plan)
$0-$10,000

Final Tips for a Traditional IRA

  1. Make sure to allocate your IRA contribution to the year 2017 if you want to reduce your 2017 tax bill.
  2. If you already have an IRA, the total amount you can contribute to multiple IRAs can’t exceed the annual limit. For example, if you’ve already stashed away $2,500 for the year in one IRA, you can only contribute $3,000 to any additional IRAs. (If you are over 50, the limit increases to $6,500 total.)
  3. You must be under the age of 70 ½.

You must receive taxable compensation such as:

  • Wages, salaries, and tips
  • Sales commissions
  • Professional fees
  • Bonuses
  • Self-employment income
  1. A non-working spouse can fund an IRA up to the limits as long as the working spouse makes enough taxable compensation to fund both accounts – $11,000 if under 50 yrs of age or $13,000 if over 50.
  2. Your earnings for the year must cover your IRA contributions. For example, if you only make $4,500, you can only contribute up to $4,500 to your IRA.
  3. You must start withdrawing money from your IRA at age 70 ½.

Save for your future. Save money on your taxes. Save the planet.

All in one smart money move.

Related:  Impact Investing Fun (and Easy!)


More from our lawyers: Well Wallet is an informational platform for personal finance, and unless specifically stated otherwise, the content is provided to you without charge. Well Wallet is not a financial planner, broker, or tax advisor. We cannot provide any advice for your specific financial situation. Our goal is to help you understand how to better manage your finances and how your finances affect your life goals, but we can never make any guarantees about your financial future (or present). The material here is meant for informational purposes only.  It should not be considered legal or financial advice.  See our Terms & Conditions for more information.

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