Make these last-minute moves to qualify for important retirement savings tax breaks.
The end of the year has a variety of retirement planning deadlines you need to meet in order to qualify for tax deductions and credits. Retirees also need to take action by specific dates to avoid retirement account penalties. Here are some of the retirement planning moves you need to make before next year:
Make last-minute 401(k) contributions. All 401(k) contributions are typically due by the end of the calendar year. Employees can contribute up to $18,000 to a 401(k) account in 2015. Workers age 50 and older can make catch-up contributions worth an additional $6,000, or a total of $24,000 in 2015, which are also due by Dec. 31. An investor over age 50 who is in the 25 percent tax bracket and maxes out his traditional 401(k) will save $6,000 on his federal income tax bill. But even a smaller contribution of $5,000 would save him $1,250 in taxes. At a minimum, double check that you have saved enough to get any employer match offered by your company.
Take required minimum distributions. Retirees born before July 1, 1945, are required to take distributions from their individual retirement accounts and 401(k) plans by Dec. 31, 2015. The distribution amount is calculated by dividing the account balance by an IRS estimate of your life expectancy, and sometimes a spouse's age is also taken into account. The penalty for missing a required distribution is a stiff 50 percent of the amount that should have been withdrawn. However, if you turned 70 1/2 in 2015, which is those born after June 30, 1944, and before July 1, 1945, there is a special rule that allows you to delay your first required distribution until April 1, 2016. But the second (and all subsequent) distributions will be due by Dec. 31 of the same year. Retirees who delay their first required minimum distribution will need to take two distributions in the same year. "Taking a double distribution in 2016 could cause you to pay more for taxes and may even push you into a higher tax bracket," says Helga Cuthbert, a certified financial planner for Cuthbert Financial Guidance in Decatur, Georgia. "You're usually better off taking it the year you turn 70 1/2."
Extra time for IRA contributions. You have until April 15, 2016, to contribute up to $5,500 to an IRA that can be applied to tax year 2015. Workers age 50 and older are eligible to contribute an additional $1,000, for a total contribution of $6,500 in 2015. As you are working on your 2015 taxes, you can plug an IRA contribution into your tax planning software and watch how it decreases the income tax you owe. "When you are doing your taxes, if you have some tax liability, you can pay it to the government now or maybe put some money away for retirement and pay the tax on it at a later time," says Francine Duke, a certified financial planner for Aqua Financial Planning in Chicago. "You can reduce the amount you owe and help increase your retirement savings by putting some money in an IRA." The same April 15 deadline applies to Roth IRA and myRA contributions for 2015.
Claim the saver's credit. If your adjusted gross is below $30,500 for individuals, $45,750 for heads of household and $61,000 for couples in 2015 and you contribute to a 401(k) or IRA, you may be able to qualify for the saver's credit. This valuable tax credit is worth between 10 and 50 percent of the amount you contribute to a retirement account, up to $2,000 for individuals and $4,000 for couples. "If you contribute to a traditional IRA, you get the deduction, and then lower and middle income people get a saver's credit on top of that," Duke says.
Get ready for 2016. 401(k) and IRA contribution limits will remain the same in 2016. But if you weren't able to max out these accounts in 2015, consider setting your contribution amount a little higher next year. If you get a raise, bonus or tax refund, redirecting part of it to a retirement account will set you up for a lower tax bill in 2016. "If you get a year-end bonus, look into making a one-time contribution to your 401(k) or 403(b)," says Robert Reed, a certified financial planner for Partnership Financial in Columbus, Ohio. "If you are not maxing it out already, that will make a huge difference."
By Emily Brandon
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
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