Retirement plans and/or accounts can be a benefit in many ways, especially if there is a need for you to reduce your tax liability. Are you one of the taxpayers that has seen your tax liability increase when filing your 2018 tax return? If this is you, you may want to start using or review how you are using your retirement accounts. There are ways you may be able to reduce your tax liability for the current year and if you are not taking advantage of a corporate retirement plan being offered at work or an individual retirement account (IRA) this may be the time to start or increase your contributions.
Typically there are two ways you can put money away for retirement, on a pre-tax basis and post-tax basis. We will simply discuss the pre-tax basis in this article and address the post-tax basis in the future. Those of you that are taking part in your corporate retirement plan, but not maxing out may be missing significant benefits. These pre-tax contributions go into your retirement account, many times along with an employer match, and will grow tax deferred until you remove the funds sometime in the future. The tax liability you had last year may be reduced this year by starting or raising the contributions you make to your retirement plans. The monies that are placed in the retirement plan directly come off of your taxable income for the year, providing you with tax relief.
As an example, in 2019 employees under the age of 50 can defer a maximum of $19,000 into their company’s 401(k). Taxpayers that are in the thirty-percent tax bracket could save close to $5,700 in taxes by maxing out their 401(k). Not only is this providing you with a tax savings, but the true cost of putting away the $19,000 for retirement was only $13,300, giving you a significant benefit. The idea here is that this will lower your tax liability, allow you to put funds away for your retirement and also provide you with years of tax deferred growth.
You will want to make sure that you are taking advantage of all the benefits provided by your company with regard to retirement accounts, tax benefits, match, and deferring as much as you can afford. Those of you who work at companies that do not provide retirement plans may want to look at establishing an IRA. This works very similarly to what we have described with the 401(k) but the maximum that can be contributed is $6,000, if you are under 50 years of age. Business owners may also want to look at the benefits and disadvantages of establishing a retirement plan for their company. This would allow them to help their employees become retirement ready while helping themselves as well.
Keep in mind that this is a pay now or pay later system. By taking the tax deduction now and receiving the benefit of tax deferral, you will need to pay taxes on these monies when they are withdrawn in the future. The idea is that you put these monies away while you are earning income and in a high(er) tax bracket and remove the monies in retirement when you are in a low(er) tax bracket. This strategy, like many other financial planning principles, contains many variables and assumptions that may not remain constant. As an example, if tax rates go up significantly in the future, you could be paying more in taxes when you remove the funds than you would have when you put them into the account. This is why you need to have an overall retirement strategy that will provide you will both taxable, tax-free and tax advantaged income in retirement.
Now that the first tax season with the recent changes are complete, you will have a better idea as to how your tax situation is being affected. If you experienced a higher liability or tax surprise in 2018 and would like to review strategies that may allow you to reduce your tax liability going forward, please feel free to contact us, Mitlin Financial, at (844) 4-MITLIN x12. Feel free to let friends, family and business acquaintances who are experiencing the same concerns that we are here to help too. We look forward to helping you, and them, make the decision that is best for all.
This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.