A client of mine recently asked me if she could still make a 401k contribution for the prior year (2017). Unfortunately I had to explain that no, she couldn’t - that window closed on December 31st.
But good news! There is still time to save in a tax-smart way for the prior year.
Many people don’t realize that with an Individual Retirement Account (IRA), you have until the time you file your tax return (aka April 15th or October 15 for extended tax returns) to make a contribution for the prior year. So if you’re looking for a smart way to keep more of your money in your own pocket, (or interest bearing account!) before you file your 2017 tax return you should ask your tax advisor (do it now) if you still have the ability to contribute to your IRA for 2017.
Here are a few things you should know about IRA’s:
- Many of us will qualify for this tax-savings strategy, but exceptions do apply. For instance, there are certain IRS rules governing contributions to an IRA; if you make too much money or already contribute to an employer retirement plan, like a 401k, you may not be eligible to make additional contributions. While I don’t want to get in the weeds on those rules, just know that if you are single and make under $133,000/year (or married and your combined income is under $196,000), there is a chance you are eligible to contribute in some form, so read on!
- Roughly one third of the money you make gets paid out in taxes in some shape or form (I know, sad-face emoji should go here.) But here’s the good news: contributing the maximum amount ($5,500) to a Traditional IRA saves you tax dollars now while at the same time building up your nest egg for the future (I swear, future you will thank you). When you file your tax return, you would record a $5,500 contribution on line 32 of the Form 1040, which reduces your AGI (adjustable gross income), thus lowering your overall tax.
3. If you are a self-employed entrepreneur, did you know that you cancontribute roughly 25% of what you earn into a “SEP-IRA”? The highly motivated/highly earning self employed, could plow up to $54,000 into this account. The SEP-IRA is really a must have for anyone who works for themselves, understands they need to save for the future, and wants to lower their tax bill.
4. Ok - this strategy won’t technically lower your tax bill for the prior year, but it will lower future tax obligations. Introducing the Roth IRA, which is my favorite of the IRAs (you know you are a tax nerd when you have a “favorite IRA”). With a Roth, you can contribute up to $5,500 per year and while you don’t get to reduce your tax bill for contributions made now, you also never have to pay tax on the savings and earnings that grow over time. In the short term, that might not seem like a big deal, but spread out over time, trust me, it IS a big deal.
Here's my calendar. Make your appointment with me, today, for a free review of your 2016 taxes. You may be eligible to keep more of your money. http://bit.ly/VirtualOfficeVisitBB
Think about this - if you are 21 years old and save $5,500 a year into your ROTH IRA, earn an average return of 7% (not an unreasonable long term average if you invest wisely in a passive, low cost index strategy) and reinvest the earnings, when you turn age 59 and a half (the year you are now eligible to make qualified withdrawals from the Roth IRA), you would have about $950K! Unlike Traditional IRAs or other retirement plans, there is also no age requirement to begin taking distributions from this account. If you let that money grow for another 10 years, you would have over $1.8 million. You could realistically withdraw $75,000 from that, tax free for the rest of your life. $75K plus whatever social security brings in (I don’t take the apocalyptic view on social security. I understand it has long term question marks, but I believe it will still be around for future generations) is a nice little chunk of tax-free change to support your retirement.
Don’t Stress. It’s Not Too Late
Don’t have extra money to contribute now to your IRA? Don’t stress. Take it step by step and you’ll build a better financial future.
If you don’t have the $5,500 max contribution amount now, here is what I recommend: look at what you make each month and set aside 5% from each paycheck you receive. Each month, take that 5% that you have set aside, and contribute it into your IRA. If your cash flow situation allows or your goals are strong enough, try increasing it to 10%. By becoming disciplined to the practice of “pay yourself first”, with every paycheck you earn, you are putting into motion principles for living your optimal life.
Retirement saving should be like breathing. Do it in small amounts, all the time, without thinking about it...and be tax-smart about the choices you make.
As I said earlier, don’t stress. You can still start now. The best time to plant a tree was 20 years ago. The next best time is now. Get started!
Simple? You Bet.
So how do you go about contributing to an IRA? There are many strategies, but one, very simple option is to open an account with an online brokerage company like Vanguard or Fidelity (Note - I don’t get paid a dime for recommending those). Both of these financial service providers walk you through the administrative side and have helpful service teams if you get stuck. But if you want investment advice, expect that to cost money.
I want everyone to save and use tax-smart strategies to help them reach their goals. Think about making a contribution to an IRA and talk with your advisor. If you are eligible, able and willing, taking this one simple step could be a good way to keep more of your money, pay less in taxes and reach some of the big goals in your life.
Did I pay too much in 2016?
Did you pay too much in taxes during 2016? I’d be happy to sit with you, review your last return and look for ways to maximize your 2016 tax savings. And if you’re ready to get smart about taxes, you’re probably also ready to invest in yourself and work with a financial life guide to help you move more deliberately towards your goals and start living your optimal life. I can help you with that, too!