Tax-savvy Tips for Retirement Savings



With the New Year with us, it is appropriate to consider your retirement savings and find out if you are benefitting at all from any applicable tax law with regard to your retirement future.

Melissa Sotudeh, a certified financial planner in Washington, D.C., offers tax-savvy advice on retirement savings.

What is the most vital aspect in retirement accounts tax-planning?

To a certain degree, you can control your income tax bracket by maximizing salary deferrals — for instance, by maxing your retirement accounts, such as 401(k) and IRA plans; hence, reducing your taxable salary. On the other hand, you can become tax-efficient when you invest money for college education, retirement or other objectives.

If you are in a lower tax bracket, take advantage of specific deductions, such as those for seeking a job or relocating for work, and tax credits, such as the education credit or the child-tax credit. Contribute to a Roth 401(k) as well, allowing you to pay lower-rate taxes today and then take out your Roth funds free of tax when you retire.

When you reach a higher tax bracket, salary deferral could be the best choice for a lower taxable income. Maximize your contributions to 401(k) or Health Savings Accounts.

Approach your investment planning as tax-efficiently as you can. This has nothing to do with tax brackets, rather, with the tax treatment of your portfolio investments. Strategies involve keeping the right investments in the right account (e.g., keeping tax-advantaged investments such as municipal bonds in a taxable account), annual tax loss harvesting and selecting funds with tax-effective features, such as low turnover ratios.

What is the most common pitfall in terms of income and tax brackets?

People do not leverage tax-advantaged savings instruments before they are phased out -- which is a common error with Roth IRAs. Although a great savings tool, your capacity to contribute starts to get phased out beyond specific earning levels. For 2017, the Roth IRA salary limits start once you begin receiving more than $118,000 ($186,000 for married, filing jointly). At the $133,000 income level ($196,000 for married, filing jointly), you are not qualified to contribute.

Likewise, not using the catch-up allowance for tax-deferred retirement accounts and HSAs, which allows you to contribute way above your retirement account when you are 50, is a big mistake. If you can, take full advantage of this chance to rev up your saving and limit your taxable salary. The catch-up contribution for retirement accounts, for instance, 401(k)s, is presently $6,000, aside from the regular $18,000 limit. It should give you a total maximum contribution of $24,000 every year for 50-above individuals.

$1,000 catch-up contributions for HSAs are permitted beginning at age 55, aside from the maximum yearly contribution of $3,400 for individuals or $6,750 for families.

What else can people do about optimizing their tax status?

Giving to charity through Donor Advised Funds is an efficient way to optimize tax management in any particular tax year. Using these funds, you will be able to give money or appreciated assets and avail of the tax deduction for your donation during the year that you contributed the amount. Nevertheless, you need not choose a recipient beneficiary for your donation within that year. You may let assets in the fund to increase in time and contribute to any 501(c)(3) charitable group any time you desire.

No matter what investment method you choose, choose the appropriate tax strategy needed to optimize investment taxes.

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