Contributing to a Retirement Plan Can Save You Money
Contributing to a Retirement Plan Can Save You Money
REDUCE YOUR TAXABLE INCOME WHILE BUILDING A NEST EGG
Investing the maximum allowable contribution per year to a retirement account is a great way to reduce your taxable income. Below, are several types of accounts that are available to taxpayers.
TRADITIONAL 401(K) PLANS
401(k) plans are a common way for businesses to help employees save for retirement. Traditional 401(k) contributions are not considered taxable income, so investing in a 401(k) is a great way to invest in your retirement while also cutting your taxable income for the year. Amounts invested in this type of account are not taxed until they are distributed.
If your employer matches your 401(k) contributions, you may want to consider investing the maximum amount allowed for 2017, which is $18,000 for those under the age of 50 and $24,000 for those 50 and over. Keep in mind, these amounts are per individual. There is no such thing as a spousal 401(k).
ROTH 401(K) PLANS
If your employer allows you to put some or all of your 401(k) contribution in a Roth 401(k) account, you may want to consider doing so. Although there is no tax deferral with this type of contribution, it does grow tax free. Generally, distributions from a Roth 401(k) plan are not taxed. The contribution limits for a Roth 401(k) are the same as the limits for a traditional 401(k).
TRADITIONAL IRA PLANS
Contributions made to a traditional IRA may be fully or partially deductible. Generally, amounts in your traditional IRA, including earnings and gains, are not taxed until distributed. If you’d like to potentially reduce your taxable income through this type of account, the contribution limits for 2017 are $5,500 if you are under age 50 and $6,500 if you are age 50 or older.
ROTH IRA PLANS
A Roth IRA is an IRA that is mostly subject to the same rules that apply to a traditional IRA. The main difference is that you cannot deduct contributions to a Roth IRA. The same yearly contribution limit applies to all of your Roth and traditional IRAs, but note that your Roth IRA contribution might be limited based on your filing status and income. The contribution limits for a Roth IRA account for 2017 are the same as the limits for a traditional IRA.
If you need help determining which account is right for you, I would be happy to assist you.
OTHER TAX-SAVING OPTIONS
There are many ways to save.
Like retirement plans, there are additional education and healthcare related plans that may help you lower your taxable income.
529 EDUCATION SAVINGS PLANS
529 plans are operated by a state or educational institution and offer tax advantages and potential incentives. These plans make it easier to save for college for a designated beneficiary, such as a child or grandchild. When used for qualified education expenses, earnings are not subject to federal tax and are generally not subject to state tax. Your contributions are limited to the amount necessary to provide for the qualified education expenses of the beneficiary. This will be different based on the circumstances of your family. Be aware, though, that contributions to 529 plans are considered gifts. If you give more than $14,000 to any one beneficiary, you may have to file a gift tax return.
HEALTH SAVINGS ACCOUNTS (HSAS)
Is your health insurance a High Deductible Health Plan (HDHP)? If so, you are likely able to contribute to an HSA. An HSA is a tax-exempt trust or custodial account that is set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. There are several tax benefits to contributing to this type of plan. For example, you can claim a tax deduction for contributions you or someone other than your employer make to your HSA, even if you don’t itemize your deductions. Additionally, contributions to your HSA made by your employer may be excluded from your gross income. The account grows tax free, and distributions for qualified medical expenses are exempt from income taxes as well.
There are certain qualifications you must meet to open one of these accounts, as well as yearly contribution limits.
There Are Countless Ways to Save!
Making contributions to the accounts above are just a few ways to lower your taxable income. Other methods that may potentially lower the income that’s reported on your return include giving to a charity, paying your property tax bill early and making energy-efficient upgrades to your house. If you need help in determining the best way to reduce your income, I’m more than happy to help!
