How Planning for Retirement Is Also an Effective Year-End Tax Strategy

The end of the year is an ideal time to take a look at personal taxes and make smart moves before December 31 to minimize tax obligations. One thing to keep in mind whether retirement is on the horizon or not is that by simply contributing to certain types of retirement accounts, your taxable income is reduced. There are so many different tax treatments for retirement accounts, and it’s easy to leave money on the table or worse, have it taken away in taxes unncessarily. Whether you’re planning to retire soon or lazy days on the beach are decades away, this post contains useful and timely advice for checking in on your retirement savings and investments, and how to use them to lower your taxable income before year-end. 

 If you’re unsure where your income is in relation to tax brackets, use the IRS’s Tax Withholding Estimator. It’s meant to be a “paycheck checkup” that can alert you to any unexpected tax bills. It’s most useful if you have experienced a significant life event in the past year. 

So, what can be done before the end of 2019? 

Year-End Tax Planning and Retirement Reminders for Working Taxpayers

Proper retirement planning can reduce your tax burden, increase your savings accounts, and help fund your future. That’s why we recommend that you max out all available retirement account avenues, if possible. Here’s a quick refresher on the most common, tax-friendly ways to save for retirement: 

  • 401(k) Plan: This is your employer sponsored retirement plan. You can contribute up to $19,000 in 2019 plus an additional $6,000 if you are over the age of 50. These limits apply for 403(b), 457, Roth 401(k), and Roth 403(b) plans as well. Many employers match 401(k) contributions up to a certain amount, so this is the first retirement account to max out. The deadline is December 31, 2019.

As a side note, you might want to double-check your total 401(k) contributions with your CPA if you switched jobs or if you have more than one job with this type of benefit. If you over-contributed, you can correct it before the end of the year–otherwise, you will owe a stiff penalty come tax time. 

  • Traditional IRA: You can set aside $6,000 tax-free here, plus an additional $1,000 if you are 50 or older, making it a good way to reduce your taxable income. However, there’s a list of caveats to meet before you can take a tax deduction. 

If you or your spouse has an employer sponsored retirement plan and contributions were made this year, you may not be able to deduct the full amount of an IRA deposit. Also, there are income limits that depend on marital status and filing situation. One more thing–you pay taxes on the contribution and the earnings upon withdraw. Age requirements apply. The deadline is tax day, April 15, 2020. 

  • Roth IRA: This type of IRA will not save you tax dollars now, but it can generate significant savings later if you expect to draw on it in a higher tax bracket than where you are currently. Remember, money enters this account post-tax. This retirement account has the same contribution limits, age restrictions, and deadlines as the traditional IRA. But, unlike the traditional IRA, you can contribute to both your 401(k) and Roth IRA in the same year as long as you stay within the limits. 

If you plan to use either type of IRA plan, you need to know that the limits are all-inclusive. That is you may only contribute a total of $6,000 (or $7,000 if over 50) to both the traditional and Roth accounts. Obviously, this limits the tax benefits available. 

  • HSA: The Health Savings Account offers tax-payers a way to save on three different fronts–if you have access to it through a high deductible health insurance plan. 

First, the money goes into the account pre-tax and reduces your taxable income. Then, the money grows tax-free. Finally, it can be withdrawn at age 65 or older for any reason without paying the 20 percent penalty imposed by the IRS. Taxes are paid at that time, unless the funds are used for qualifying health expenses. The deadline is tax day, April 15, 2020.

If you are into your retirement years, you should also check on your required minimum distributions (RMD). At age 70 ½ you must withdraw a certain amount from each of your tax-deferred retirement plans and pay ordinary income tax. Your CPA can help you figure out the amount(s) based on your age and several other factors. 

The team at Naden/Lean is ready to talk with you about tax-saving opportunities and how they connect to your retirement goals. Contact us today with your questions.