How to Cut Taxes While Saving for Retirement
If one of your resolutions this year is to do a better job of planning for your retirement, part of that job includes planning for the tax bite you will incur once you retire. A recent USA TODAY article explains how you can help reduce your taxes while saving for retirement:
Use your 401(k). Contributing to a 401(k) from each paycheck provides you with a temporary tax windfall, since your 401(k) is funded with pre-tax earnings and what is allocated as a 401(k) contribution is not counted toward your taxable income at the end of the year. In 2014, you can contribute up to $17,500 to your 401(k) if you are under 50; those over 50 can contribute up to $23,000.
Get an IRA. If you don't have a 401(k), open an IRA to reduce your taxable income and provide you with an IRA contribution deduction. In 2014, you can contribute up to $5,500 to an IRA if you are under 50; those over 50 can contribute up to $6,500.
Saver's credit. To incentivize retirement saving for lower income people, the IRS provides additional tax credits for making contributions to an eligible retirement savings plan. Taxpayers earn a tax credit worth a percentage of the contribution - the lower the income, the higher the percentage. The income limit to qualify for the saver's tax credit is $60,000 for households, $45,000 for heads of households, and $30,000 for individuals.
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