Last-Minute Tax Savings to Give Your Retirement Savings a Nudge
Nobody likes to pay any more taxes to Uncle Sam than is absolutely necessary. Fortunately, the IRS tax code provides certain tax benefits for participation in various retirement savings accounts to help lower our taxes. But as the end of the year approaches our tax reduction options for the 2015 tax year become a little more limited.
Here are a few last minute alternatives that can help reduce your taxes now (or later) while ramping up your savings for retirement:
Make last minute contributions to a 401(k) or 403(b) retirement plan. One method of reducing income taxes while saving for retirement is to increase pre-tax contributions to a 401(k) or 403(b) plan if you are covered by one of these retirement plans at work. The IRS limit for 401(k) and 403(b) plans is $18,000 in 2015 ($24,000 for ages 50 or older) and this limit does not include any matching contributions. If you are not able to contribute up to the maximum amount this year, at least make sure you are getting the full employer match if one is provided. Contact your human resources department to see how you can put more money in by year end.
Contribute to an Individual Retirement Account (IRA). Another common tax reduction strategy that can be used for retirement is to make a deductible contribution to an IRA. The contribution limit is 100% of compensation up to $5,500 ($6,500 if you are 50 or older) or your taxable earned income for the year if your compensation is less than these limits. Keep in mind that if you are already participating in a retirement plan through your employer, the ability to deduct these contributions is limited based on your income. For the 2015 tax year, the ability to make deductible IRA contributions is not an option if you are a single filer with modified adjusted gross income (MAGI) of $71,000 or more ($118,000 for married couples filing jointly). If you’re married filing jointly with a spouse covered by a plan but you’re not, you can also make deductible IRA contributions if the MAGI is below $193,000.
Take advantage of other retirement savings options if you are self-employed. Additional opportunities to set aside retirement assets in tax-advantaged accounts exist for entrepreneurs and self-employed. SEP IRAs, SIMPLE IRAs, and Solo 401(k)s are popular retirement saving options for the self-employed. Simple IRAs must be setup prior to the October 1 deadline and Solo 401(k) plans must be set up by December 31. However, SEP-IRAs can be established until April 15 of the following year (October 15 if filing an extension.
Roth accounts can help lower your future income taxes. If your employer offers a Roth 401(k) or Roth 403(b) option you may want to consider making contributions to those accounts if you don’t need a current year tax deduction. Pre-tax contributions to an employer-sponsored retirement plan or to a deductible IRA may be less advantageous if you are in a lower tax bracket, are not in your peak earning years, or if you anticipate being in a higher marginal tax bracket in the future. In those situations, it may make more sense to contribute to a Roth account to take advantage of tax-free earnings growth. Keep in mind that Roth IRAs have different income limitations than deductible IRAs but the contribution amount is the same.
If you are still trying to decide which type of IRA makes the most sense for you be sure to check out this helpful traditional vs. Roth IRA guide.
Consider setting aside funds in a Health Savings Account (HSA). If you are enrolled in a High Deductible Health Plan, HSAs are a tax-advantaged, way to help pay for future health-related expenses with immediate tax benefits. HSAs also make an excellent last minute savings strategy to help reduce your income taxes. In 2015 the HSA contribution limits are $3,350 for individual coverage and $6,650 for family coverage. If you are age 55 or older, there is an additional $1,000 catch-up contribution until Medicare eligibility begins at 65.
Health savings accounts are unique in that they offer triple tax exemption. The money that you put into HSAs lowers your current taxable income, grows tax-deferred, and comes out of your account tax-free as long as you use it for health-related expenses. HSA are often considered an important retirement savings vehicle because there are no penalties for using these accounts for non-medical expenses once you reach age 65. (Non-qualified withdrawals after age 65 are taxed at ordinary income tax rates.)
HSA contributions can still be made until April 15, 2016, for the 2015 tax year. The convenience and simplicity of making contributions through automatic payroll deductions is an appealing feature of HSAs. However, many HSA participants are unaware of the additional time allowed to make contributions for the 2015 tax year outside of regular payroll deductions. You have until the tax filing deadline (not including any extensions) to make extra contributions to your HSA if you didn’t already max out your contributions through payroll deductions by December 31. In order to take advantage of this tax saving opportunity, you would need to make direct contributions to an HSA account by directly writing a check or setting up automatic transfers from your bank account.
An additional benefit of the tax deduction for HSA contributions is that you do not have to itemize deductions to claim the deduction. For tax purposes, HSA contributions are considered an above the line deduction. This means they can help lower your adjusted gross income (AGI) and potentially help qualify you for other tax deductions and credits that are income dependent.
If you are healthy or don’t need access to your HSA funds there is no “use it or lose it” provision as is the case for flexible spending accounts (FSA). As a result, you can continue to leave HSA funds in your account and let your balance grow into your retirement years. Health savings accounts also provide diversified investment options through various mutual funds that offer long-term growth potential.
Unlike contributions to an IRA, health savings accounts do not have income limitations. Just be aware that you must be covered by a high-deductible health insurance plan with a health savings account attached to it during the 2015 tax year. The deadline for making HSA contributions is April 15 even if you are filing an extension.
Estimate your tax savings. If you are curious to see your estimated taxes for the 2015 tax year you do not have to wait until you’ve filed your tax return. This pre-tax savings calculator may be used to estimate the tax implications of additional contributions to an employer-sponsored retirement plan, deductible IRAs, self-employed plans, or HSAs.