How to Save a Little More on Your 2016 Taxes

2 - How to Save a Little More Header ImageAre you hoping to lower your tax bill come April? While there’s not a lot you can do in terms of income and expenses at this point, you still have one very powerful option available: contribute to your Traditional IRA.

These retirement savings accounts can be incredibly powerful – not just for taxes, but for your future. Here’s how.

Prepare for tax-deferred growth

The most powerful aspect of IRA and other retirement accounts is their ability to fully utilize the benefits of compound interest. Because your savings have the potential to grow tax-deferred over the long run, you can greatly enhance your potential wealth by the time you reach retirement.

Think of it this way: in a normal investment account, you’d need to pay taxes on any realized capital gains. And even in a fairly steady asset allocation, occasional rebalancing will trigger transactions that can cause realized gains and losses.

For the sake of illustration, let’s say those realized gains trigger a tax payment of $1,500 per year. Instead of growing at the long-term average rate, that money gets taken out of your account and eliminated forever.

It might not sound like such a big deal, but it really adds up.

If you estimate that your investments will grow at an average rate of 5% per year over the course of 20 years, that seemingly small tax payment will result in lost wealth of over $76,000. In other words, every year that you take money out of your account to pay taxes you’re losing the potential for growth over the entire lifespan of your account.

So, while you do pay income taxes on any IRA withdrawals you make in retirement, the long-term potential for tax-deferred growth in the meantime can have a significant impact on your wealth later on.

Add in your contribution tax benefits

Most people can take a partial or full deduction for their Traditional IRA contribution (Roth IRA contributions are made on an after-tax basis, so they aren’t covered in this article).

That makes IRAs doubly powerful: not only can they help provide tax-deferred growth over your working life, they offer an additional tax benefit in the meantime.

However, there are limits.

Free Download Your Home is a tax Haven

Learn More

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

Download our free guide to the tax benefits of home ownership.

If you have a retirement plan at work (or if your spouse does), you may encounter ceilings on your deduction. Specifically:

2016 Deduction Limits on IRA Contributions (for those covered by a plan at work)
Filing status… With a modified AGI of… Contribution limit is…
Single or head of household Under $61,000 Full deduction up to the contribution limit
Between $61,000 and $71,000 A partial deduction
Above $71,000 No deduction
Married filing jointly or qualified widower Under $98,000 A full deduction up to the contribution limit
Between $98,000 and $118,000 A partial deduction
Above $118,000 No deduction
Married filing separately (unless you did not live with your spouse at all during the year – in which case consult the “single” status) Under $10,000 A partial deduction
Above $10,000 No deduction

If you are not covered by a retirement plan at work, the deduction limits are much more generous. Specifically:

2016 Deduction Limits on IRA Contributions (for those covered by a plan at work)
Filing Status… With a modified AGI of… Contribution limit is…
Single or head of household Any amount Full deduction up to the contribution limit
Married filing jointly or separately with a spouse who is not covered by a workplace retirement plan Any amount Full deduction up to the contribution limit
Married filing jointly with a spouse who is covered by a workplace retirement plan Under $184,000 Full deduction up to the contribution limit
Between $184,000 and $194,000 A partial deduction
Above $194,000 No deduction
Married filing separately with a spouse who is covered by a workplace retirement plan Under $10,000 A partial deduction
Above $10,000 No deduction

2 - How to Save a Little More Info Image

In all cases, the contribution limit for 2016 is $5,500. And even if you don’t qualify for the tax deduction, you may want to consider contributing anyway. Many people can benefit from the tax-advantaged structured of IRA accounts, especially when there are limited outside options for building retirement wealth.

Of course, it’s important to note that every situation is different: what works for one person may not work for another. However, we would argue that few people suffer from saving too much for retirement – in fact, in our experience, many people have the opposite problem!

There’s still time!

You have until the April 18, 2017 tax filing deadline for 2016 to make IRA contributions. So whether you could use an extra deduction or want to keep up with your retirement planning, you still have time to reap the benefits of retirement planning – and the tax breaks it involves.

Get ahead of your taxes by getting the most from your home

Are you looking for other ways to save on taxes?

Free Download Your Home is a tax Haven

Learn More

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

Download our free guide to the tax benefits of home ownership.

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.

How To Save A Little On Your 2016 Taxes Infographic

Important disclosures

Material provided by Augury Consulting. Augury Consulting is not affiliated with Vitucci & Associates Insurance Services or United Planners. 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. The listing of a product on this site does not constitute an endorsement or warranty of the product 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/ira-year-end-reminders
https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras-1
https://www.irs.gov/retirement-plans/plan-participant-employee/2016-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work
https://www.irs.gov/retirement-plans/plan-participant-employee/2016-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-not-covered-by-a-retirement-plan-at-work
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

  • 3 5 Ways to Improve Retirement Readiness in Your 50s Header Image5 Ways to Improve Retirement Readiness in Your 50’s
    You’re saving money, getting serious about financial planning, and monitoring your investment accounts. But retirement planning isn’t just about saving money: it’s about the habits and lifestyle you build ahead of your golden years. Read on for 5 ways that you can start building retirement readiness here and now – and none of them have to do with your portfolio.
  • 2 How to Prepare for a Rocky Start to Retirement Header ImageHow to Prepare for a Rocky Start to Retirement
    What happens when you have a great retirement plan – only to get caught off-guard with an early retirement? Our client Linda experienced exactly this scenario. Currently 61, Linda is single and has been in complete control of her finances since her divorce nearly 20 years ago. A client of ours for years, Linda was on track to retire at age 67 with her investment accounts, Social Security, and a deferred annuity to see her through the golden years. That is, until she was unexpectedly laid off at age 59 – and struggled to find a new job. Here’s what Linda did as we helped her navigate this challenging situation.
  • 1 Whats a Portfolio Stress Test Header ImageWhat’s a Retirement Stress Test, and Why Do I Need One?
    If you follow the financial news, you may have heard about annual “stress tests” at the major banks. These tests help determine whether banks have the financial stability to get through a major problem, like a market crash or economic downturn. It’s a worthwhile undertaking, but for the average person these tests might seem a little abstract. Oftentimes, banks will incorporate possibilities like a rising interest rates, a collapse in emerging markets, or an economic boom leading to higher inflation. You might even be falling asleep just thinking about it! But stress tests are useful for individuals, too – especially pre-retirees