taxes

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.

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.

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