Yahoo Finance Retirement Contributions To Lower Your Taxable Income
It’s tax season and you’re likely looking for any opportunity available to reduce your tax liability. If you’re saving for retirement, you’re in luck.
“There are a handful of options to save for retirement and lower your taxable income,” said Hunter Brockway with Boca Retirement Strategies. “When you contribute to these plans, that amount you contribute correlates to reducing your taxable income. It’s important to remember in almost all cases, Uncle Sam will be patiently waiting for his cut in the future. In some cases, paying taxes today rather than later may be a better option for you, and all avenues should be evaluated for your situation.”
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Here are some ways to lower your taxable income while saving for your retirement.
Contribute To an Employer-Sponsored Plan
“If your place of work offers a 401(k) or 403(b) plan, participating can lower your taxable income,” said A.J.Shoemaker, a financial advisor with Capital Estate Advisors. “If you are younger than age 50, you can contribute up to $20,500 per year on a pre-tax basis or if you’re age 50 and older, you can add an extra $6,500 per year in catch-up contributions, bringing your total 401(k) contributions for 2022 to $27,000. Since 401(k)s are taken out on a pre-tax basis, it lowers your taxable income, resulting in fewer taxes paid overall.”
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Contribute To an Individual Retirement Account
“Whether your employer offers a retirement plan or not, you can still contribute up to the lesser of your earned income or $6,000 ($7,000 if you’re age 50+) to an IRA,” said Cindi Turoski, CPA, managing director, The Bonadio Group.
Contribute To a Spousal IRA
“You can make a spousal IRA contribution even if your spouse doesn’t have earned income — as long as you have enough earned income to cover both of your contributions,” Turoski said.
According to the Internal Revenue Service, you can make a contribution to a spousal IRA up to the current limit, which is $6,000 (or $7,000 for those 50 or older).
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Make Catch-Up Contributions
“If permitted in your 401(k) plan, participants age 50 or older at the end of the calendar year can also make a catch-up contribution, which is an additional $6,500 in 2022,” said Wilson Coffman, president of Coffman Retirement Group. “So, 401(k) participants older than age 50 at the end of 2022 can actually contribute up to $27,000.”
Coffman also said that if you are older than age 50, you can contribute an additional $1,000 to your IRA in catch-contributions for a total of $7,000 for 2022.
Contribute To a Health Savings Account
“An HSA can be another valuable retirement savings vehicle,” Turoski said. “If you qualify (you’re covered under a high-deductible health plan (HDHP)), you can contribute to an HSA on a pre-tax basis. You not only save tax on the contribution, but you’re also not taxed on the earnings as it grows, and it can come out tax-free when used to pay for qualified medical expenses. There’s nothing else I can think of that is triple tax-free! It’s even more powerful than an employer retirement plan since it has taxable distributions.”
See: Here’s the Average IRS Tax Refund Amount
Make a Charitable Donation
“Offering charitable gifts is one way for individuals to reduce their taxable income from retirement contributions,” said Siva Mahesh, financial advisor and founder of Dreamshala.
“Individual Retirement Account holders aged 70-½ and onwards can transfer up to $100,000 to an eligible charity sans income tax on the transaction. Likewise, couples who file a joint tax return need not pay income tax on up to $200,000 in IRA charitable donations. Individuals can also qualify for a tax break if they donate $100 directly from their IRA. Their tax liability can be reduced according to their tax bracket.”
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Take Advantage of a Saver’s Credit
“Additionally, anyone who contributes to a retirement account and falls below certain income thresholds may be eligible for the Saver’s Credit,” said Matt Stratman, a financial advisor at Western International Securities. “This tax credit can be worth up to $1,000 for individuals or $2,000 for married couples. This is a fantastic approach to planning for retirement while also qualifying for a significant tax credit to help cover some of the expenses.”
Put Your Tax Refund Toward an IRA
You can also reduce your taxable income by opting to deposit part or all of your tax refund into an IRA using IRS Form 8888. You can choose to use the refund to reduce this year’s or next year’s tax bill as long as you meet the IRS contribution deadline, which is April 15, 2022, for the 2021 tax year.
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This article originally appeared on GOBankingRates.com: Retirement Contributions To Lower Your Taxable Income
