Retirement Savings Advice from The Money Coach!
A great way to get a tax deduction is through retirement savings, says Lynnette Khalfini-Cox, The Money Coach. She explained the three types of savings programs and how you can use them to save money on your taxes this year and for years to come.
An employer sponsored 401K is a great way to save money on your taxes. You are allowed to put up to $17,500 pre-tax income in this account. If you're 50 and older, you get a "catch-up contribution" allowance of an additional $5,500 per year. You need to put all contributions in by December 31 of the year you're filing for (so, in this case, by December 31, 2013 for the 2013 fiscal year) in order to take advantage of the tax deduction. Lynnette explains that the deduction can be a great write-off — if you earn $50,000 annually and contribute $10,000 in a year, you're only taxed on a $40,000 annual net income for the year.
An IRA is an individual retirement account and this contribution is also tax deductible, up to $5,500 (with a catch-up credit of $1,000) per fiscal year. The great thing about an IRA is that this money can be contributed up until you file taxes — so you can actually contribute until April 15, if you file your taxes at the deadline. Any contribution made comes off your gross income so that you are taxed at your net income rate, same as a traditional 401K.
A Roth IRA does not have a tax break on the front-end, but when you're of retirement age, all the money taken out is taken out tax-free. Lynnette says you should start now, because every dollar matters, especially if you have an employer match program. If you contribute $100 every two weeks (or every traditional pay period) and your employer matches, that's $4,800 contributed each year. You may want to start yours this year after you get your tax refund, but that money will not count against your 2013 taxes, it will go toward your 2014 taxes.
Will you contribute more money to your retirement savings this year? Tell us in the comments.