It’s tax season, and that means Uncle Sam could be digging into your pockets for all the cash he can get. The idea is to stop him in his tracks, though, with some retirement tax savings quick-hit strategies.
But first, let’s pull the lens back and reveal why a broad-based retirement tax strategy, structured correctly, can really put more of your hard-earned money into your pocket (and less into Uncle Sam’s) during, and sometimes even before, your retirement years.
“There are really three key factors in retirement savings,” says Rick Rodgers, a certified financial planner and author of the book, “Don’t Retire Broke: An Indispensable Guide to Tax-Efficient Retirement Planning and Financial Freedom.”
[See: 10 Costs You Can Eliminate in Retirement.]
Rodgers lists all three in his book, as follows:
— Tax-deferred savings: how to make the most of your IRA, 401(k), and other tax-differed retirement vehicles.
— After-tax savings: how to build your investment plan around the important concept of asset allocation; five important risk-reducing investment strategies; and — last but not least — how to structure your investments in the most tax-efficient way possible.
— Tax-free savings: defines the smartest tax-free retirement savings methods — the Roth IRA and Roth 401(k) — and how to convert your existing accounts to these options.
“The truth, in matters of taxes, is that once the IRS gets its hands on your money, it’s lost to the abyss that is the federal Treasury,” Rodgers says. “So you must act before that event takes place.”
Good idea — but what are the best ways to do that when it comes to your retirement savings? Using Rodgers’ strategy as a platform, and after consulting with several retirement tax experts, here are five good ways to save money on taxes that can be better used for your retirement fund.
Leverage the saver’s credit. The saver’s credit is an IRS-sponsored tax credit above and beyond the advantage of tax-deferred savings when contributing to a 401(k), 403(b), IRA, or myRA, says Catherine Collinson, president of Transamerica Center for Retirement Studies. “Because this double benefit sounds too good to be true, many eligible savers may be actually confusing the two incentives,” Collinson says. “Many workers who are saving for retirement may be missing out on the saver’s credit because they are unaware of it. For those who are not already saving, the saver’s credit could be a nudge to get them started, if only they knew about it.”
[Read: Are You Overlooking Tax Deductions?]
Fund your health care insurance and save on taxes. One obscure, yet effective tax savings trick is to fund a health savings account with funds from an individual retirement account, says Justin Smith, a financial advisor with Slayton Lewis, in Chicago. “The IRS will allow you to do a once-in-a-lifetime transfer of funds directly from your IRA to your HSA, up to a max equal to your annual HSA contribution limit ($3,350 individual, $6,750 family plus $1,000 catch-up if over 55),” he says. “This effectively converts funds in your IRA that would be taxed in retirement into funds that can be used tax-free for health-care expenses, which you are all but guaranteed to experience in retirement.”
Over 50? Play catch up, aggressively. Older retirement savers should definitely take advantage of over age-50 contributions that start the year you will turn 50, says Richard E. Reyes, a certified financial planner and founder of the Wealth & Business Planning Group in Maitland, Florida. “With traditional IRAs, you can contribute up to $6,500 if you’re 50 or over. In a 401(k) plans, you can contribute $24,000 at that age,” he says.
Do well, tax-wise, by doing good. Kevin Michels, a money manager at Medicus Wealth Planning, in Draper, Utah, strongly advises looking into qualified charitable distributions. “If you are 70.5 and subject to required minimum distributions on your tax-deferred retirement accounts, you can lower your tax bill by making charitable contributions directly from your IRA,” Michels says. “This moves your charitable giving tax deduction from an itemized deduction to an above-the-line deduction, which lowers your adjusted gross income. This is especially beneficial for retirees who take the standard deduction instead of itemizing.”
Buy a rental property. With all the expenses and depreciation of the rental property to offset the income derived from rentals you can end up with a tax loss while still making a real profit on the property, Michels says. “However, don’t let the tax deductions drive the decision to buy a rental property,” he says. “Make sure you’ll receive a good return on your investment and you’re up to the task of being a landlord.”
[See: 11 Tips for the Sandwich Generation: Paying for College and Retirement.]
These aren’t the only creative and effective retirement planning tax breaks available to all Americans, but they are some of the best. As always, talk to a trusted tax and financial advisor for more details, and ask about other money-saving ideas they have on retirement and taxes.
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5 Retirement Savings Moves to Ease Your Tax Bill originally appeared on usnews.com
