When it comes to saving for retirement one of the most important factors is to find a plan that allows you to either put off paying for taxes or save money on taxes altogether. To their credit, the federal government gives tax breaks to people saving for retirement using specific tools and accounts and, below, we have a list of some of the best. Enjoy.
One of the very best ways to take advantage of federal government tax breaks is with a 401(k) retirement account. Depending on your eligibility this type of account can help you to defer income tax on $17,500 of your earnings in 2013, which is $500 more than it was in 2012. If you are over the age of 50 you can defer the taxes on income of $23,000 and, no matter what your age, you won’t have to pay any income tax on these contributions until you start withdrawing the money that you placed in them. (Once you hit 70 ½ years age you have to start withdrawing.) One of the biggest benefits of a 401(k) is that, if you are in a lower tax bracket when you retire, the amount of money taken out of your plan will be lower as well.
A Roth 401(k) plan has the same limits as a regular 401(k) as far as contributions are concerned but, when it comes time to pay the tax man, there’s a few differences. What a Roth retirement account allows you to do is put in your contributions with “after-tax dollars”. Since you’ve already paid taxes, when you withdraw from your Roth account you won’t be taxed and, even better, any earnings that you’ve made won’t be taxed either. Many employers are now offering a Roth 401(k) option to their employees and some are even converting their existing accounts to Roth accounts. Most experts recommend that, if you are in a 15% tax bracket, using a Roth 401(k) is an excellent idea.
A basic IRA allows you to defer your income taxes on $5500 in 2013 or, if you are 50 years of age or older, $6500. If you happen to have a retirement plan at your place of work however, or your adjusted gross income is between $59,000 and $69,000 this year, this tax deduction will unfortunately be phased out. One of the reasons to use an IRA is that, in general, it gives you a few more investment options than a 401(k) does and the ability to look for lower fees. This can be important if you have a large amount of funds in a 401(k) plan and an expense ratio that’s above 1%. With an IRA you could then invest your money in anything else you want and possibly make more interest while paying less in fees.
A Roth IRA is excellent for retirees as it gives them much more flexibility. For example, there’s no need to withdraw any money from a Roth IRA while the original account owner is still alive. What that means is that if you want to, you can pass a Roth IRA on to your heirs without any penalties. With a Roth IRA the limits are $5500 or, if you are 50 years of age or older, $6500 in 2013. Contributions are phased out if you are earning between $112,000 and $127,000 (or $178,000-$188,000 if you’re part of a couple). If you’d still like to contribute to your Roth IRA but you earn above these limits, you can convert some of the money from your traditional IRA to your Roth IRA.
If you are aged 70 ½ or older the federal government requires that you withdraw money from your traditional IRA and pay income tax on it. However, if you are one of the fortunate people who doesn’t need the money that’s in your IRA you can donate up to $100,000 of that money to charity and avoid paying the required income tax on your required withdrawals. This is referred to as an IRA tax-free charitable contribution.
If you want another investment vehicle go to the bank and ask about fixed rate bonds. This is truly a conservative investment, unlike a floating rate bond the interest rate remains the same regardless of market fluctuations. If you have extra money that you can lock into a fixed rate bond for a set period of time, then they can be much more beneficial than a typical savings account. If you decide this is for you, find a good reputable bank to inquire into these bonds. Birmingham Midshires Savings come highly recommended.
Lastly there is the Saver’s credit, something that’s available for low to moderate income individuals who have saved some money for retirement in a 401(k) or an IRA. The numbers in this case are $1000 for individuals and, for couples, $2000. With this plan the retirement savers with the lowest incomes will get the biggest tax credit, a credit that is calculated based on your income and up to $2000 worth of contributions.
Whatever retirement savings plan you choose, it’s best to choose wisely and stuff as much money into it every year as financially possible for your particular situation. If you have any questions about 401(k) retirement plans Roth IRA plans or any other type of financial questions regarding your retirement, please let us know and we’ll be sure to get back to you with advice, suggestions and answers.