Seven Ways to Grow Your Retirement Savings—and Reap the Tax Benefits

retirement-plan-options1It’s never too early to save for retirement. And, actually, it is critical to start saving early before retirement planning requires setting larger amounts of money aside over a shorter period of time.

Contributing to a retirement account allows you to put money away before taxes are taken out—which also decreases your taxable income. Here’s how to take full advantage of 401(k) and individual retirement accounts (IRAs) in 2016.

Max out your 401(k). It’s a lofty goal, but workers who max out their employer-offered 401(k) plans will also save, at minimum, $4,500 on their federal income tax bills, depending on the tax bracket percentage they fall under. Workers can contribute up to $18,000 in 2016. People aged 50 or older can contribute an additional $6,000 in catch-up contributions, for a total of $24,000. To completely max out this account, you will need to save $1,500 a month (that’s $750 per semimonthly paycheck). If you are 50 or older, you’ll need to save $2,000 a month.

If these contributions are made via (pre-tax) payroll deduction, the tax benefits are immediate because less money is withheld for income taxes.

In retirement, 401(k) account withdrawals are taxed as ordinary income. And if you drop into a lower tax bracket in retirement, you will pay that lower rate on the distributions.

Meet your employer’s match. Maxing out your 401(k) is a pretty ambitious goal, and not everybody can do it. But if your employer offers matching funds, you should at least try to contribute enough to take full advantage of that “free” money. Let’s say your employer offers a 401(k) match up to 6 percent of pay. If your annual salary is $50,000, this means contributing $200 a month, or $100 per semimonthly paycheck—which is much more manageable than $1,500 a month. Plus, your employer will contribute an additional $200 a month.

An easy way to gradually build up to your employer’s full match is to increase your contribution percentage with each raise or pay increase. This way, you won’t feel the difference in your paycheck.

Diversify: Open an IRA. In 2016, retirement savers can defer income tax on up to $5,500 in IRA contributions. People over age 50 are allowed to put in an extra $1,000 in catch-up contributions, for a total of $6,500. Maxing out an IRA requires saving $458 each month ($542 if you’re 50 or older).

It’s important to note that taxpayers who have a 401(k) account at work and a modified adjusted gross income of more than $71,000 ($118,000 for joint filers) in 2016 won’t be able to claim the tax deduction for their IRA contributions. You also won’t receive the full tax deduction if your income is between $61,000 and $71,000 ($98,000 to $118,000 for joint filers). If you are married to someone with a retirement account, the tax deduction for your IRA contributions is phased out (partial deduction) for couples earning between $184,000 and $194,000. There is no deduction for couples earning more than $194,000.  More information on IRS deduction limits can be found here.

Consider a Roth IRA. You won’t get a tax deduction for Roth IRA contributions, but withdrawals are tax-free if you are at least 59 1/2 and your account is at least five years old. The contribution limits are the same as traditional IRAs. Roth IRA eligibility phases out for taxpayers whose adjusted gross income is between $117,000 and $132,000 ($184,000 to $194,000 for married couples).

Claim the saver’s tax credit. If you save in a retirement account and your adjusted gross income in 2016 is less than $30,750 for individuals, $46,125 for heads of household and $61,500 for married couples, you may be eligible for the saver’s credit. (Income limits are adjusted annually.) Contributions of up to $2,000 ($4,000 for joint filers) could earn you a tax credit worth 10 to 50 percent of your retirement account deposit. The less income you have, the higher the percentage.

Automate your savings. As they say, out of sight is out of mind. If you have a portion of your pay direct-deposited into a separate retirement savings account, you are less likely to accidentally spend cash earmarked for your nest egg.

Consider hiring a pro. Retirement planning can be stressful and confusing. Getting an objective point of view on how to meet your goals may be well worth the money. To be sure you are also maximizing your retirement plans’ tax benefits, contact us. www.ramsaycpa.com

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About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

2016 Tax Season Opens Jan. 19 for Nation’s Taxpayers

WASHINGTON ― Following a review of the tax extenders legislation signed into law last 19thweek, the Internal Revenue Service announced today that the nation’s tax season will begin as scheduled on Tuesday, Jan. 19, 2016.

The IRS will begin accepting individual electronic returns that day. The IRS expects to receive more than 150 million individual returns in 2016, with more than four out of five being prepared using tax return preparation software and e-filed. The IRS will begin processing paper tax returns at the same time. There is no advantage to people filing tax returns on paper in early January instead of waiting for e-file to begin.

“We look forward to opening the 2016 tax season on time,” IRS Commissioner John Koskinen said. “Our employees have been working hard throughout this year to make this happen. We also appreciate the help from the nation’s tax professionals and the software community, who are critical to helping taxpayers during the filing season.”

As part of the Security Summit initiative, the IRS has been working closely with the tax industry and state revenue departments to provide stronger protections against identity theft for taxpayers during the coming filing season.

The filing deadline to submit 2015 tax returns is Monday, April 18, 2016, rather than the traditional April 15 date. Washington, D.C., will celebrate Emancipation Day on that Friday, which pushes the deadline to the following Monday for most of the nation. (Due to Patriots Day, the deadline will be Tuesday, April 19, in Maine and Massachusetts.)

Koskinen noted the new legislation makes permanent many provisions and extends many others for several years. “This provides certainty for planning purposes, which will help taxpayers and the tax community as well as the IRS,” he said.

The IRS urges all taxpayers to make sure they have all their year-end statements in hand before filing, including Forms W-2 from employers, Forms 1099 from banks and other payers, and Form 1095-A from the Marketplace for those claiming the premium tax credit.

“We encourage taxpayers to take full advantage of the expanding array of tools and information on IRS.gov to make their tax preparation easier,” Koskinen said.

Although the IRS begins accepting returns on Jan. 19, many tax software companies will begin accepting tax returns earlier in January and submitting them to the IRS when processing systems open.

Choosing e-file and direct deposit for refunds remains the fastest and safest way to file an  accurate income tax return and receive a refund. The IRS anticipates issuing more than nine out of 10 refunds in less than 21 days. Find free options to get tax help, and to prepare and file your return on IRS.gov or in your community if you qualify. Go to IRS.gov and click on the Filing tab to see your options.

  • Seventy percent of the nation’s taxpayers are eligible for IRS Free File. Commercial partners of the IRS offer free brand-name software to about 100 million individuals and families with incomes of $62,000 or less;
  • Online fillable forms provides electronic versions of IRS paper forms to all taxpayers regardless of income that can be prepared and filed by people comfortable with completing their own returns.
  • The Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) offer free tax help to people who qualify. Go to irs.gov and enter “free tax prep” in the search box to learn more and find a VITA or TCE site near you, or download the IRS2Go app on your smart phone and find a free tax prep provider.

The IRS also reminds taxpayers that a trusted tax professional can provide helpful information and advice about the ever-changing tax code. Tips for choosing a return preparer and details about national tax professional groups are available on IRS.gov.

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About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.