Tax season should make you think of saving for retirement
As you enter the new year, you are probably thinking about taxes. Now is a good time to consider how you could lower your current taxes while setting aside money for your future. Here are a couple of ideas to help make that happen.
Traditional Individual Retirement Account (IRA) contributions may be tax deductible.
If your income is below IRS limits, or you don’t have a retirement plan at work, your contributions to a traditional IRA can be tax deductible, potentially reducing your overall tax liability. And you may be able contribute now (before the April filing date) to reduce your taxes for the previous year. If you don’t have an IRA, you may want to start one to take advantage of an IRA’s benefits.
Contributions to employer-sponsored retirement plans can further reduce your taxable income.
If your employer offers a retirement plan and you’re currently contributing to it, your contributions may also reduce what you may pay in taxes. Contributions made on a pre-tax basis reduce your current taxable income. Since your taxable income is reduced, you’ll pay less in taxes overall, and you won’t be taxed on your retirement plan contributions until they are withdrawn.
Your employer’s plan may also allow Roth contributions. These contributions are made on an after-tax basis and do not reduce your current taxable income now. However, the earnings on your Roth contributions and any withdrawals can be tax-free if you are over age 59½ and have had the account for at least five years.
Know the tax rules.
Each of these opportunities has tax rules regarding eligibility, contribution amounts, and taxation of distributions. As with all tax information, you should consult with a tax advisor regarding any tax-favored retirement products and your specific situation.
Saving for your retirement could help you save on income taxes now and perhaps even in the future. If you haven’t gotten started with saving for retirement or you’re not taking advantage of these tax-reducing tips, what are you waiting for?
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment, tax or legal advice.
The factors which affect your decision to contribute to a traditional or Roth IRA are complicated and can change each year. Contributions to traditional and Roth IRAs are aggregated for purposes of annual limits. If you take money out before age 59 ½, you could be subject to a penalty tax of 10% in addition to income taxes. This is not intended to be tax advice. You should consult with a tax adviser regarding any tax-favored products and your specific situation.