Don’t forget to make qualified retirement plan contributions

Don't Forget Ret Acct ContributionsThe 2015 tax filing deadline is right around the corner, and if you’re worried about owing additional taxes you might be starting to feel a bit worried. But there’s good news! If you have a qualified retirement account you still have a chance to reduce your tax burden with a timely contribution.

Here’s what you need to know to make the most of it.

Retirement plans and limits

Most savers have a 401(k), IRA, or a combination of both. While these accounts have vastly different contribution limits, the great news is that you can use both to save for the future and reduce your taxes today — but keep in mind that the tax benefits of using both plans are phased out as your income rises.

Retirement Account Contribution Limit for 2015 Additional “catch-up” contribution for those over 50 years old
401(k) $18,000 $6,000
Traditional IRA $5,500 $1,000

Not ready to deal with taxes? If you file an extension, you’ll have until the next deadline to set money aside in these tax-advantaged accounts. But don’t lose sight of your goal: sometimes, waiting can make it harder!

Why does it matter?

Putting money away in a retirement account benefits you in two ways.

First, if you contribute to a 401(k) or Traditional IRA, your contribution is deducted from your income — that means every dollar you put into your account is completely tax free! The amount you contribute is subtracted from your overall income, meaning that it reduces the Adjusted Gross Income on your tax return. That means less money to Uncle Sam.

But there’s also another powerful benefit. Money in a qualified retirement account grows tax free until you start taking distributions in retirement. That means you won’t pay taxes on dividend income or realized capital gains during the years you’re saving for retirement. Therefore, any gains you make can be fully reinvested, and with the power of compounding those gains can add up very quickly.

Think about it this way: for every $1 of realized long-term capital gains in your account, you would normally pay 15 to 20 cents in taxes, unless your income qualifies you for the special zero rate. If your account earns $5,000, then, you’d pay $750 to $1,000.

Every time you reinvest that money and give it the opportunity to grow, you’re supercharging the potential of your savings for the long run.

Don't Forget Ret Accounts

$750 invested today at an average 8% return per year will grow into almost $3,500 in 20 years. Now imagine the power of putting that extra bit aside every single year!

What does this mean? Contributing to your qualified retirement account isn’t just about saving on taxes today. It’s about giving yourself every opportunity for a financially healthier retirement.

Wait! I don’t have a retirement account!

If you don’t already have a retirement account, it’s unfortunately too late to set one up in time for your 2015 tax return. However, you should consider using this opportunity to plan ahead for 2016. Getting started now will make tax planning much easier the next time around and will give you more time to make a serious impact on your retirement future.

There is, however, one major exception to this: if you work for yourself, you can still establish a retirement plan in time for 2015.

A Simplified Employee Pension IRA, or SEP IRA, can be set up until your tax filing deadline. These plans are particularly powerful for freelancers and entrepreneurs because, officially speaking, your company makes the contribution on your behalf. They’re also allowed for businesses with multiple employees, though it should be noted that SEP IRAs require the same percentage contribution for each employee.

The best part about SEP IRAs is that the contribution limits are significantly higher than for other IRAs. For 2015, the limit is the lesser of $53,000 or 25% of the employee’s income, making these plans fantastically flexible for those who are self-employed and want a simple plan. You can even fund one through a side business. We recommend speaking to an accountant or qualified advisor if you think a SEP IRA might be a good fit for you.

Retirement contributions: a win-win for your financial plan

For many people, tax-advantaged retirement savings can be a key part of the financial planning process by helping you to meet two important goals: managing your tax liabilities today and planning for retirement down the road.

However, some savers benefit from a different kind of retirement account: a Roth IRA. Roth accounts are different because you fund them with income earned after taxes. While you do have to pay taxes on the money you contribute to a Roth, you do get the benefit of tax-free withdrawals in retirement. Roth accounts can thus be very powerful for those who expect their income to rise in retirement, or for those who aren’t concerned about tax-advantaged saving in the short term.

At the end of the day, choosing the right retirement account is a balance between your priorities, projections for the future, and the gamble of trying to predict tax policy. If you’re not sure how to start, we recommend speaking to an advisor to walk you through the options and discuss which one might be right for you.

But if you already have a traditional retirement account and you’re looking to manage taxes for 2015, contribute now, while you still have time. Your accountant — and your retired self — will thank you.

Act Today!

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

United Planners does not provide tax or legal advice