When tax season rolls around, it’s time to take stock of your finances from the past year – but it can also be a great time to plan for the future, as well.

“I don’t think people realize just how much of a boost a tax refund can be if it’s added to existing retirement savings,” shared Eva Kreps, Retirement Plan Advisor with First Merchants Private Wealth Advisors.

Instead of using that tax return money to go on a shopping spree, Eva said, consumers also have the option to save their return – either in a traditional savings account, a Certificate of Deposit (CD) or in an Individual Retirement Account (IRA). Over time, that amount can add up to big benefits when it comes time to retire.

“The best retirement advice is threefold: Save as much as you can, as early as you can, and get a good rate of return,” Eva explained. “Only two of those things are within our control – so we usually encourage clients to try and maximize their contributions to a 401(k) or an IRA as much as possible. And a tax return can go a long way towards that goal.”

Since a 401(k) often goes hand-in-hand with company matching contributions, Eva said it can be a good strategy to prioritize maximizing that contribution, first. Any extra windfall can then be allocated for an IRA – which is where your tax return can come in.

“An IRA is an extra pocket of money you can use when you retire, and it can go a long way towards making you comfortable in your golden years,” she explained.

By allocating your tax return dollars towards an IRA, you can pave the way for future prosperity.

But it can also give you a boost on your taxes when you go to file the following year, as well.

“Right now, the IRS offers a savers credit for folks who have savings plans like a 401(k) or an IRA,” Eva shared. “So, if you make a contribution to a traditional IRA, you could qualify for a Savers Tax Credit the next time tax season rolls around.”

That includes regular IRA contributions or contributing a tax return – as long as taxpayers aren’t going over the $6,500 contribution limit stipulated by the IRS.

“That’s aggregated,” Eva explained. “So, if you have more than one IRA, it’s the total across all of them. You can’t put $6,500 in a Roth IRA and $6,500 in a Traditional IRA. You have to choose where you want the contribution and not go over the limit between the two.”

However, she added, the contribution limit increases by $1,000 if taxpayers are over 50 – so older workers can contribute up to $7,500 in a given year.

But not every IRA has the potential to earn you a tax break.

“While any IRA has the potential to qualify for the Savers Credit, only a Traditional IRA has the potential to get you a tax deduction,” Eva shared. “Because Traditional IRAs aren’t taxed until you begin to withdraw from them in retirement.”

Dive deeper into Traditional vs. Roth IRAs

Eva also encouraged taxpayers to keep abreast of current tax requirements, as requirements for tax credits are changing in 2023, and as current regulations state, after Dec. 31, 2026, the Savers Credit will transition to a matching retirement plan contribution.

Check out the current IRS guidelines

No matter how you choose to use your tax return, Eva encourages taking the time to review your savings strategy and make sure you’re on course for a healthy, secure retirement.

Want to chart your retirement strategy? Start with one of our helpful savings calculators, schedule an appointment with one of our attentive bankers, or visit your local banking center!

Please note that this information is not intended or provided to be used as a substitute for the advice of a tax professional. You are encouraged to consult with a licensed tax advisor regarding personal financial decisions.

First Merchants Private Wealth Advisors products are not FDIC insured, are not deposits of First Merchants Bank, are not guaranteed by any federal government agency, and may lose value. Investments are not guaranteed by First Merchants Bank and are not insured by any government agency. This material has been prepared solely for informational purposes. First Merchants shall not be liable for any errors or delays in the data or information, or for any actions taken in reliance thereon. Any views or opinions in this message are solely those of the author and do not necessarily represent those of the organization.