Don’t Forget to Prioritize Retirement Savings

5 - Don't Forget to Prioritize Retirement Savings Header ImageJust because 2016 is long over, doesn’t mean you can’t take advantage of the 2016 tax year. One way to do it? Prioritize contributions to your qualified retirement savings accounts!

Here’s what you need to know.

It’s too late to open most accounts – but you can contribute

At this point, you can no longer open a qualified retirement account or set up a plan for your business for 2016, with two exceptions.

The SEP IRA, typically used by small business owners or self-employed individuals, can still be established until your tax filing deadline. Roth IRAs can also be established until April 18, 2017 for the 2016 tax year (just keep in mind that contributions made to Roth IRA accounts are made on an after-tax basis and thus are not tax-deductible).

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However, even though you cannot set up other types of accounts, you can still make contributions. For 2016, the contribution limits for employees are:

Qualified Retirement Account Contribution Limits
Account Type Employee Contribution Limit
401(k) or 403(b) $18,000 ($24,000 if age 50 or older)
Traditional IRA $5,500 ($6,500 if age 50 or older)
Solo/Self-Employed 401(k) $18,000 ($24,000 if age 50 or older)
SIMPLE IRA $12,500 ($15,500 if age 50 or older)
SEP IRA Contributions must be made by employer (the business owner) up to 25% of compensation to a maximum of $53,000

There are restrictions and further details to be aware of if you have any of these accounts: please speak to your advisor or accountant, or refer to your plan documents for the specifics of how to calculate contributions. This is especially important for more complicated structures like SEP or SIMPLE IRAs.

Further, if you own your own business, the difference between employer and employee might seem irrelevant, but it’s actually very important.

SEP IRA accounts can only be funded by your business as an employer, while, for example, a Solo 401(k) can take contributions both from your business and you as a person. These distinctions can impact your tax planning on many levels, so consider speaking to a qualified advisor for help in determining which plan is best for you – though, again, most of these are not eligible to be set up for the 2016 tax year.

What’s the benefit of contributing?

You probably know that saving for retirement is important in and of itself, but the tax benefits of using a qualified retirement account are also potentially significant.  

Even if you work for an employer, saving extra through an IRA could help you lower your taxable income and thus your tax bill. For business owners, the possibility of also contributing to retirement accounts from company coffers can save you on taxes in two places.

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So what can you deduct?

Qualified Retirement Account Contribution Limits
Account Type Employee Contribution Limit
401(k) or 403(b) Employee contributions are fully tax-deductible up to the limit.
Employer matching contributions are also tax-deductible.
Traditional or Roth IRA Fully tax deductible up to the limit if your income falls under $117,000 ($184,000 for married joint filers).
Tax benefits are phased out above this threshold.
Solo/Self-Employed 401(k) Employee contributions are fully tax-deductible up to the limit.
Employer matching contributions are also tax-deductible.
SIMPLE IRA Employee contributions are fully tax-deductible up to the limit.
Employer matching contributions are also tax-deductible.
SEP IRA Employer contributions are fully tax-deductible.

Please note that contributions to workplace plans like a 401(k) are not deductible on your tax return per se – rather, they simply reduce your taxable income. For all other accounts, you can take the deduction on your return.

Again, if you’re not sure whether you qualify for a tax deduction, consider speaking to a qualified advisor or accountant. After all, every financial situation is unique.

Don’t forget about the rules governing retirement accounts

Keep in mind that IRA and 401(k) accounts are investment accounts and subject to the risks and rewards of any investment decisions that you make. That means your account could still lose value if the investments you choose do not perform well.

These accounts are also subject to limitations on the transfer of funds and may trigger penalties or taxes if you withdraw money before you reach retirement age. Also, your account may necessitate Required Minimum Distributions once you reach a certain age in retirement.

For any retirement account, be sure to check the rules and restrictions to ensure that the account appropriately meets your personal and financial needs.

Free Download Your Home is a tax Haven

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You know that your home can be a powerful part of building wealth, but are you taking full advantage?

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Let Us Help!

We can discuss this topic and more at a complimentary appointment. As a bay area retirement planning coaches, we can give you a review and make suggestions based on your retirement objectives.

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Important disclosures

The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by United Planners.

To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.

Neither diversification nor asset allocation can ensure a profit or prevention of loss in times of declining values. United Planners does not render tax advice.

Information for this article was compiled from the following resources:
https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras-1
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras

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