We hope you had a wonderful Thanksgiving and are ready for the upcoming holiday festivities. This year has passed quickly for many, and although we are in our last month of the year, there is still time to take steps to reduce your tax liability and strengthen your financial and retirement plan. Follow these tips to keep your financial plan on track.
Important Disclosure: In recent years, there have been frequent changes in tax, retirement contribution and savings, and gifting legislation. Before following any of the suggestions below, we strongly recommend contacting your tax or financial advisor to assess tax and retirement consequences and eligibility rules.
Are you still working and/or contributing to employer-sponsored retirement accounts?
- Review your contributions to employer-sponsored retirement accounts prior to year-end (401k, 403b, 457, or TSP contributions):
If you are eligible to defer your salary under your employer-sponsored retirement plan (401k, 403b, 457, or TSP), the maximum contribution allowed for 2013 is $17,500 ($23,000 if you are age 50 or older). So, if you are short of this target or will be by December 31, consider diverting a larger percentage of your December income to your retirement plan. This not only adds to retirement savings, it decreases taxable income, which in turn saves you money on taxes.
Check with your firm immediately about your ability to change salary deferral mid-year or ask your HR department or payroll contact for the means and steps to allocate more of your salary to your employer-sponsored retirement account.
Tip: Make the change soon! Remember to set your percentage or amount back to a more comfortable amount starting with your January paycheck.
- If age 50 or older, take advantage of catch-up contributions.
If you are age 50 or older, you are allowed to make additional contributions to your employer-sponsored retirement plan (401k, 403b, 457, or TSP). For salary deferral, you can defer an additional $5,500 into your retirement savings account for a maximum of $23,000 in 2013 ($17,500 plus $5,500).
- Have you maxed out contributions to your employer-sponsored retirement account?—Think IRA contribution!
If you have maxed out your employer-sponsored retirement account salary deferral for the year or will by December 31, 2013, first of all, pat yourself on the back: Good job! Then consider making a contribution to an IRA (Individual Retirement Account) or ROTH IRA for year 2013. If eligible, you are allowed to contribute up to $5,500 to either an IRA or ROTH IRA (but not both) plus $1,000 catch up for those age 50 or older.
Eligibility to contribute to any type of IRA is dependent on having earned income in the contribution year, and you may be subject to income phase out rules, so please check with your tax advisor regarding eligibility rules, income limits, and deductibility rules.
Tip: You are allowed to make a current year IRA contribution right up until April 15 of the following tax year, so there is no reason to miss this important contribution deadline.
- Are you self-employed and not contributing to your company-sponsored retirement plan?
If you are self-employed, you have the right to contribute part of your income to a self-employed retirement savings plan like a SEP IRA (Simplified Employee Pension), a solo 401k (i401k), or SIMPLE IRA (Savings Incentive Match Plan for Employees). Setting one up, or maxing out your contribution for the current year if you have one, is an excellent way for those self-employed to shelter income.
There are a number of eligibility, administrative, and timing rules for setting up such an account so be sure to check with your tax advisor for the details. Sheltering income again decreases your taxable income for the year which in turn saves you money on taxes.
Important: Before following any of the steps above, we strongly recommend you check with your tax advisor and/or financial advisor to assess tax consequences, timing deadlines, and eligibility rules.
This post was addressed to those who are still working and/or contributing to retirement accounts. If you are retired, taking regular distributions from your retirement accounts, or looking to decrease the value of your estate with gifting, you will want to return to this Momentum finance blog to read the second part of our 2013 tax planning and year-end tips, which will be posted in a few days.