One way to avoid tax penalties or qualify for tax breaks is to meet the deadlines for your retirement accounts. Some usually have year-end deadlines for the required contributions and distributions and there are those which gives you a little more time to deposit to count towards the 2016 tax year. Making your 401 (k) contributions in time before the deadlines will qualify you for the tax breaks that comes with retirement savings.
The contributions towards 401 (k) are usually due by the end of the year and one can claim a deduction on tax up to $18,000 saved into a 401(k) account for the current tax year. It is possible to reduce your tax bill by $4,500 if you fund your 401(k) account in the current tax year as long as you are within the 25 percent tax bracket. There will be no income tax charged o this money till when you will want to withdraw it. This means one can maximize the employer contributions into this account and grow savings faster while playing around with the tax breaks to one’s advantage. You can make sure to contribute whatever amount that will maximize the amount the employer can contribute to a given category.
In line with catch-up contributions, those aged 50 and above can make an additional $6,000 into 401(k).this increase the amount of tax older people can defer to a maximum of $24,000 as they enhance their savings towards retirement. A certified financial planner, Sarah Stanich, with The Stanich Group says you can take advantage of catch-up contributions provisions as long as you have hit 50. This allows people to top up their annual retirement savings contributions for a better retirement plan in the later years.
Qualify for the saver’s credit
Many savers may not be aware of this but you can be eligible for saver’s credit if your income reaches a given level per year. For an adjusted gross income below $30,750 for an individual or a couple’s adjusted income of below $61,500 for 2016 and if one saves in 401(k) before the yearend deadline or n an IRA by the tax deadline, high chances you are eligible for the saver’s credit when you file your 2016 tax returns. This tax credit is a lot of money to let it go just like that. It amounts to between 10 and 50 percent of your retirement accounts savings for the year up to a maximum of $2,000 and $4,000 for an individual and couple respectively. This is a very effective way to reduce your tax burden dollar for dollar while encouraging savings. According to Stanich, this credit cannot be claimed by those under the age of 18, full-time students or those already claimed as another person’s dependent on a tax return.
Remember required minimum distributions
For those 70.5 years and above, taking the minimum distribution of retirement is required from your traditional IRA or 401(k) by the end of 2016. The income tax is due on withdrawal that must be done by 31st December 2016. There is a tough penalty for failing to take the required minimum distribution. You get fined 50 percent of the amount you are supposed to withdraw and the income tax is still charged on the required minimum amount even if you don’t take it. The best way to avoid this penalty if to automate the withdrawal with your financial institution in order to avoid manually requesting it each year as it is very easy to forget. This can then be transferred automatically to your bank for use or saving at your discretion. This can be set to distribute monthly or on a specific date each year depending on your needs.
For those who just turned 70 and a half in 2016 can delay the first distribution requirement till the 1st of April 2017 after which all distributions must follow the stipulated schedule due by end year each year thereon. However, this delay means that you will take two distributions within 2017 and this may push you into a higher tax bracket or result in an unusually high tax bill in the same year.
If you save for retirement with Roth 401(k) then you are also required to withdraw each year. You can, however, avoid paying income tax on the distributions. There is no requirement to take Roth IRA withdrawals in your lifetime.
Donate your RMD to charity
At or above 70 and half years of age, a contributor can transfer a maximum of $100,000 annually to a qualifying charity. This transfer is exempt from income tax bills. This transfer to charities can also be used to satisfy an individual’s requirements for minimum annual distributions of retirement savings
Extra time for IRA contributions
The 401(k) contributions are usually required to be made by the end of the current calendar year, however, those contributing into the traditional IRA have an extra time till the next year in April when taxes are filled. This allows the contributor to qualify for available tax deductions on the 2016 tax returns. Maxing out on your 401(k) contributions before the year ends is advisable for better savings and to gain from all these tax breaks and employer contributions into one’s retirement account. Based on your retirement plan, IRA or 401(k), a proper scheduling is necessary to avoid unnecessary penalties and missing out on the tax and contribution benefits available.
Many people just go on with routines of paying tax and contributing to their retirement accounts without adequate advice on the best way to do these. At least now you have some insight into how these systems work for a better saving by maximizing on the amount your employer can contribute with you and get the available tax breaks. It is also worth noting that you should plan or even automate your distributions each year in order to avoid being penalized for failing to withdraw or withdrawing less than the allowed minimum amount per year. And if you have no immediate need for the money, then donating to a qualifying charity of your choice is the best way to keep up with the requirements for withdrawals and also avoid paying income tax on the amount withdrawn.