One of the goals for most income-earners is to make as much money as possible during their working years so they can retire comfortably. Come tax time, many find a significant portion of their income eaten up by taxes. There are a few actions you can take to alleviate some of this pain next April.
Max Out Company Retirement Accounts First
If you work for a company that sponsors a retirement plan — such as a 401(k) or SEP IRA — the best thing you can do is put as much into these accounts as allowed by the company and the IRS. This is especially true if your company matches all or a portion of your contributions. The employee match portion is essentially free money. It doesn’t make sense to turn that down.
Company-sponsored 401(k) accounts don’t just help you save for retirement. They also help reduce your taxable income. So come next April, your adjusted gross income will be less.
SEP IRAs are designed to encourage retirement savings for sole proprietors, partnerships, and corporations — entities that may not otherwise set up employer-sponsored retirement plans. The allowable contribution is significantly higher than a traditional IRA, making this a good choice for those who fall within the guidelines. SEP IRAs are treated like traditional IRAs for tax purposes.
Adams Accounting Solutions advises clients to maximize contributions to company-sponsored retirement accounts before investing anywhere else.
Other Ways to Save
There are other retirement accounts that wage earners can benefit from if they choose.
Traditional IRA — A Traditional IRA allows taxpayers to invest pre-tax dollars that grow tax-deferred until they’re withdrawn during retirement. At that point, the money is taxed at the individual’s current tax rate. There are no capital gains or taxes on dividends assessed. A Traditional IRA is different from a Roth IRA because the Traditional IRA is funded with pre-tax dollars.
Roth IRA — A Roth IRA is a great place to squirrel away a little more income after maxing out your contribution in your employer-sponsored retirement account. Roth IRAs are funded with after-tax income, so when it’s withdrawn during retirement, it’s tax-free. Many people don’t realize they can have a Roth IRA in addition to a 401(k) or other retirement accounts. It’s wise to maximize contributions to both if you’re able to do so.
Make Contributions by December 15
As with any investment, the sooner you do it, the longer your money has to grow, assuming market conditions are favorable. Adams Accounting Solutions recommends making 2021 contributions to your retirement accounts by December 15. While the actual deadline is April 15, 2022, contributing by December 15 keeps records clean and eliminates the potential that accountants and account owners will have to guess at which year the contribution was for.
Call Adams Accounting Solutions for Retirement Savings Advice
There are other avenues available when saving for retirement and potentially reducing tax liability. Call Adams Accounting Solutions today and schedule a consultation. We’ll help you determine the best investment options for your situation.
Richard Adams is a graduate of Benedictine College in Atchison, Kansas, with dual majors in Accounting and Business Administration. He is also a graduate of Wentworth Military Academy in Lexington, Missouri.