The government, when not encouraging spending to spur the immediate economy, encourages saving to keep the future economy on target. This encouragement comes in the form of tax breaks given for directing money away from consumerism today towards retirement (consumerism later).
The first tax break you can get, and generally should get, is for a 401(k) contribution. If a 401(k) or 403(b) is available to you, there are several good reasons to take advantage. Not only is the amount you contribute deducted from the income on which your tax will be calculated, but some employers offer a matching contribution. If you can, contributing the amount to take advantage of the maximum match — free money — is a great decision. Contributing beyond that amount, to the maximum of $15,500, is a way to diversify your tax exposure.
You can deduct a further $4,000 from your taxable income for a $4,000 contribution to a Traditional IRA. There are certain conditions which would make the contribution non-deductible, depending mostly on income.
The next step would be SEP IRAs. I have Schedule C income in addition to my day job, so I can put a portion of that into another retirement plan. The amount invested, to a generous maximum of $45,000, can be deducted from my Schedule C income. There’s another limit, however. Only 25% of your income can be directed towards the SEP IRA.
The CNN Money article (linked below) also mentions the Keogh plan, with which I have no experience. There are details here. The contribution limit this year is $45,000 or 100% of your income, which ever is lower.
If your total income is $25,000 or less (or $50,000 if you file jointly as a married couple), you may also qualify for the “saver’s credit.” That could provide you with a credit of up to $2,000.
The IRS also allows you to create and fund these retirement accounts as late as the date you file your taxes. I start working on my taxes in January or February (though I try to be conscious of my taxes throughout the entire year) and will make the decision of how much to invest at that point. There’s no need to rush to finish everything by January 31, but it doesn’t hurt to be aware of these options.
Should the government do more to encourage saving?
7 Year-End Tax-Saving Moves [CNN Money]
Published or updated November 20, 2007. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.