One of the best presents you can give yourself this year is to maximize contributions to your deductible or nondeductible retirement plan. Whether you’ve been contributing all year or have yet to start, here are a few tips to get the most from tax advantaged retirement plans.
First, know your contribution limits
Try to contribute as much as the law allows so you get the most benefit if you contribute too much, you may have to pay double the taxes.
If you have an Individual Retirement Arrangement (IRA), you can generally contribute up to $5,500 for 2016 and per year moving forward. If you are married and file a joint tax return with your spouse, you can each contribute the limit to your plans.
Any taxpayer age 55 or older at the end of the year can contribute up to $6,500 per year to a deductible or nondeductible IRA.
For Roth IRAs, the amount you can contribute starts to phase out when your modified adjusted gross income reaches $117,000 ($184,000 if married filing jointly).
If you contribute more than the limit to your IRA account, all excess contributions are taxed at 6 percent per year as long as the extra amounts remain in the account.
To avoid the tax, consider withdrawing the amount over the limit or take out any income earned on the excess contribution.
The maximum contributions to 401(k), 403(b) and 457 plans are $18,000, or $24,000 if you are age 50 or older.
Keep in mind, if you’re in a Deferred Compensation Plan, called a 457(b), you’re subject to a separate limit of $18,000 that includes both your contributions as well as those made by your employer.
No matter what kind of plan you’re in, TaxAct calculates your maximum contribution for you when you follow the step-by-step interview.
Know your deadlines
If you’re slowly getting started on your IRA contributions for 2016, you still have time. Contributions can be made until the due date of your 2016 tax return, which is April 18, 2017.
However, contributions to a 401(k) or similar plan are different. All pre-tax contributions are deposited directly from your paycheck throughout the year, so you can’t add outside money to boost your tax break.
But, some employers will allow you to designate year-end bonus money to your 401(k) if you let them know well before the money is paid to you.
Talk with your employer soon if you wish to add any bonus money to your retirement account.
Make your contributions automatic
The beauty of a 401(k) deduction is that it’s automatic. It’s hard to miss the money when it’s deducted from your pay before you receive your paycheck. If you want to increase your contribution, contact your employer.
With an IRA, it’s easy to procrastinate. However, you can make it automatic by having a portion of each paycheck deposited into a separate account or with an automatic transfer from checking to a special savings account every month.
Move money from other accounts
Money for IRA contributions doesn’t have to come from your checking account and this month’s budget. You can simply transfer money from your brokerage or savings account and get the same benefits.
Moving money from an alternate account to your checking is a way to afford an increase to your plan contributions if you’re worried about squeezing your monthly budget.
You can only contribute cash to an retirement plan however. Other assets, such as stocks, are not allowed as regular contributions.
Before you move money to a retirement account, make sure you are meeting your other financial objectives, like maintaining an emergency fund.
Make periodic payments
With an employer retirement account, you’re already making monthly periodic payments.
If you have an IRA, consider sending small contributions to your brokerage or other institution in quarterly or even monthly periods as a way to slowly add money throughout the year.
It can be a lot less painful than coming up with the money all at once.
Earmark a financial windfall
If you’re lucky enough to receive a windfall, such as inheritance money or winnings from a contest, you can always add that to your IRA as well.
Simply estimate the tax on the amount you receive and place it in a special tax account or immediately send it to the IRS to make sure you are covered come tax time.
This works for bonuses, federal or state tax refunds, proceeds from selling assets and so on.
Don’t let that good fortune slip away – pay yourself first by putting it in your retirement account!