Trim Taxes by Boosting Retirement Savings
Max out your contributions while you can and prepare to save a bit more next year.
There’s still time to trim your 2013 income tax bill and boost your retirement savings at the same time.
You have until December 31 to contribute up to $17,500 to your 401(k) or to another tax-deferred retirement account, such as a 403(b) for teachers and nurses, a 457 plan for police officers and other local-government workers, or the Thrift Savings Plan for federal workers and military personnel. (the maximum will remain at $17,500 in 2014).
At the very least, try to contribute enough to capture all of your employer’s matching contribution. Otherwise, once the year ends, those unclaimed dollars are gone forever.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If you're 50 or older, you are allowed to put in an extra $5,500 in catch-up contributions in your workplace-based retirement plan, sheltering up to $23,000 of your salary from federal and state taxes in 2013 (although you'll still be nicked for payroll taxes that fund Social Security and Medicare).
Tell your employer to adjust your remaining paychecks to boost your contribution, if necessary. And if you receive a year-end bonus, ask whether you can defer some or all of it to your retirement account.
Low-income workers and those who work part-time or intermittently -- perhaps you landed a new job partway through the year after months of unemployment -- have an added incentive to feed their retirement account. In addition to the usual tax breaks, you may qualify for the retirement saver’s tax credit, which can be worth up to $1,000 (tax credits reduce your tax bill dollar-for-dollar).
To qualify for the credit, your income can’t exceed $29,500 if you are single; $44,250 if you’re the head of a household with dependents; or $59,000 if you’re married filing jointly. In addition, you must be at least 18 years old by the end of the year, you cannot be a full-time student and you can’t be claimed as a dependent on another person’s tax return. The retirement saver’s credit ranges from 10% to 50% of your first $2,000 of retirement contributions. The lower your income, the bigger the credit. Learn more about more Tax Breaks for the Middle Class in our slide show.
Extra help for the self-employed
If you are self-employed or have a sideline business, you can stash away even more. And if you can’t come up with the cash just yet, don't worry. You won't have to fund your business retirement account until you file your tax return next spring.
If you are self-employed with no employees (other than your spouse), you can open a solo 401(k). You can contribute up to $17,500 to your plan (but not more than your earnings), and your business can kick in an additional 20% of your net self-employment income (that’s your gross self-employment income minus half of your self-employment tax) until the total pay-in for 2013 reaches $51,000.
If you're 50 or older, you can put in an extra $5,500 in catch-up contributions, for a total of $56,500 this year. Although you don’t have to fund the account until you file your tax return next spring (or by October 15, 2014 if you file for an extension), you have to establish a solo 401(k) plan before the end of this year in order to deduct the contribution from on your 2013 tax return.
If you have a sideline business in addition to a job as an employee with a company that offers a 401(k) plan, you can't double up on your 401(k) contributions. The same annual employee limit of $17,500 (plus $5,500 in catch-up contributions if you're 50 or older) applies whether you have one job or more. However, you can contribute to a SEP IRA, stashing away up to 20% of your net self-employment income up to a maximum of $51,000 for 2013 (SEP IRAs have no catch-up provisions for those 50 and older).
What’s more, you can set up and fund your SEP IRA as late as April 15, 2014, and still exclude your contribution on your 2013 tax return. And if you file for an extension, you can delay your set-up and funding date until October 15, 2014.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.
-
Why Tesla Stock Is Soaring After a Q1 Earnings Miss
Tesla came up short of analysts' expectations for its first quarter, yet its stock is roaring higher today. Here's why.
By Joey Solitro Published
-
Eight Easy Ways to Save Money Without Compromising Your Lifestyle
Saving money can be as simple as a quick phone call.
By Kiplinger Advisor Collective Published
-
'Instant' EV Tax Credits Are a Hit: $580M Paid This Year
EV Credits Claiming federal electric vehicle tax credits at the point of sale is a new and popular option in 2024.
By Kelley R. Taylor Last updated
-
Retirees Face Significant Tax Bills Due to Fraud
Fraud A new report sheds light on how older adult scam victims end up with big tax bills and lost retirement savings.
By Kelley R. Taylor Last updated
-
Tax Day: Is the Post Office Open Late?
Tax Filing Tax Day means some people need to mail their federal income tax returns.
By Kelley R. Taylor Published
-
High Earners: Beware of These Illegal Schemes to Lower Taxes
Tax Schemes The IRS says high-income filers are targets for several illegal tax schemes.
By Katelyn Washington Last updated
-
Mailing Your Tax Return This Year? What to Know Before You Do
Tax Filing There are plenty of reasons not to mail your tax return this year, but here’s what you should know if you are.
By Katelyn Washington Last updated
-
IRS Warning: Beware of Smishing and 'Helper' Tax Scams
Scams Tax season is a time to look out for email and text message scams.
By Kelley R. Taylor Last updated
-
Most Expensive States to Live in for Homeowners
Property Taxes High property tax bills make the places on this list the most expensive states for homeowners to live in.
By Katelyn Washington Last updated
-
Don’t Miss This $2,500 Tax Break for Paying Your Student Loan
Tax Deductions Do you qualify for the student loan interest deduction this year?
By Katelyn Washington Last updated