4 Ways Saving for Retirement Can Boost Your Tax Savings
While you know you should be saving for retirement, it can be hard to put away that money when you have your monthly expenses to think of. If you see the benefit now, you may be more inclined to get serious about planning for the future. Here are four ways that increasing or starting your retirement savings can boost your bottom line today.
1 – Reduce Taxable Income through Employer Plans
Many employers offer 401k plans, but employees fail to take full advantage of them. Some companies even match your contributions up to a certain point, which doubles the money you’re putting towards retirement. Another benefit is that the money you contribute is not taxable, so it doesn’t count on your income for tax purposes. The more money you put towards your 401k, the less you have to include for taxes.
2 – Some IRA Contributions are Tax Deductible
You can also put money towards your retirement through an IRA or individual retirement account. A traditional IRA allows you to save for the future regardless of where you work. Some of these contributions and possibly all may be deducted from your reported income. It will depend on your filing status and your adjusted gross income or AGI.
3 – Some Retirement Contributions Qualify for Tax Credit
The Retirement Savings Contributions Credit is a tax credit you may receive to reduce your taxes owed based on the amount you contributed to your retirement fund. This credit is designed for those in lower income tax brackets. Several retirement funds count towards this credit, including your employer 401k plan, both Roth and traditional IRAs and simple IRAs. In addition, the 403b and 457 plans are also included. Eligibility will depend on your adjusted gross income and your filing status.
4 – IRA Withdrawals are Not Taxed
In some cases, such as with a 401k plan and traditional IRA, you don’t have to pay taxes on the money you contribute but only when the money is withdrawn. With a Roth IRA, you make your contributions after the income is taxed. When the money is withdrawn at retirement, you don’t have to pay taxes. This option makes the most sense if you expect to make more in retirement and be in a higher tax bracket than you are now. An example is when someone with an entry level job begins saving for retirement. They expect to see their salary increase as they earn raises and promotions. Their retirement income may be higher than what they are currently making, which would put them in a higher tax bracket.
If you need an added incentive to get you to contribute more towards your future and retirement plans, think about how your contributions will impact your adjustable income and how much you must pay in taxes. When you see an immediate benefit, you’ll be more likely to start saving more money towards retirement. You’ll be building your future and reducing taxes owed at the same time.