Your Midyear Tax Checkup, Day 4: Revisit Retirement Contributions
With 2010 halfway complete, we’ve spent all this week providing you with tax planning tips to keep in mind for the six months ahead — the kind of advice CPAs across the country are considering for their own clients right now. These moves require some foresight and time, which is why it's important to start thinking about them now (vs. on December 31). But they're worth the effort in terms of savings and/or stress reduction.
We've discussed how to do an estimated tax analysis, which write-offs you should be thinking about, and how to make use of investment losses.
One thing we haven't yet talked about is the good ole' nest egg.
Rob Seltzer, a Beverly Hills, Calif. CPA and financial adviser, notes that midyear is a good time to reconsider how much you’re contributing to your retirement accounts — and not just because saving for retirement is good for your future, but also because it's good for your present tax situation.
By setting aside money in a 401(k), you’re deferring the income, which means it is not considered taxable for the current year. And reducing your taxable income reduces the amount you’ll have to pay tax on. If you’re eligible to deduct contributions to a traditional IRA — for couples filing jointly who are covered by a retirement plan at work, this starts phasing out starting at incomes of $89,000 — saving in that vehicle is another way to take an edge off today's income.
Bottom line: If you're not currently maxing out these accounts, consider upping your contributions. For 2010, you can stash up to $16,500 in a 401(k), plus another $5,000 $5,500 if you’re 50 or older. You can put away up to $5,000 in an IRA, or $6,000 if you're 50 or above. For a married couple in California with an income of $100,000, increasing 401(k) contributions from $10,000 a year to $15,000 shaves $1,500 off their tax bill, says Seltzer. It may take 15 minutes on the phone with HR to arrange an increase, but that's a pretty sweet return on investment.
Anyway, that's it for what the pros say you should be thinking about right now regarding taxes; but if there's something specific on your mind that we haven't discussed this week, go ahead and ask it in the comments, and we will try to put it to our experts. Now we return you to your regularly scheduled summer vacation...