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Michael Michaud is the founder of Invest2Success.com (http://www.invest2success.com/) and the Invest2Success Blog (http://invest2success.blogspot.com/). He has been investing and trading in the financial markets since 1989. He founded Invest2Success.com to empower individual institutional... More
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  • Boost Your Retirement Savings 0 comments
    Mar 2, 2014 6:37 PM

    Boost Your Retirement Savings by TurboTax

    For most taxpayers, saving for retirement is the best way to lower your taxes and to build a sizeable nest egg. TurboTax will help you take advantage of the tax deductions related to saving for your retirement. Would you walk away from money?

    If you're among the 51 million Americans who participate in a company's 401(k) plan, you can contribute up to $17,500 in 2013. And if you are 50 or older, you can stash an extra $5,500 in catch-up contributions for a total of $23,000.

    Every dollar you contribute to the plan is not taxed up front. However, that money is still subject to the payroll tax for Social Security and Medicare. If your combined federal and state income tax rate is 30%, for example, you save $300 in taxes for every $1,000 you contribute to your 401(k). So that $1,000 contribution reduces your take-home pay by just $700.

    Some employers match contributions you make to your 401(k) plan, up to certain limits. If your company is one of them, make sure you contribute at least as much as needed to capture all matching funds. Otherwise, it's like walking away from free money. Any employer match does not count toward the contribution limit cited above.

    Similar tax-deferred retirement plans, such as 403(b) plans for teachers and employees of nonprofit organizations and 457 plans for state and local government employees, and the federal government's Thrift Savings Plan have identical annual contribution limits.

    Your own boss

    If you are self-employed, you can stash even more into a tax-deferred retirement account because you contribute as both an employee and an employer.

    With a solo 401(k) plan, available only to self-employed business owners with no employees (other than a spouse), you can contribute up to $17,500 to your tax-deferred retirement account as an employee, plus 25% of your compensation (if your business is incorporated), up to a maximum combined contribution of $51,000 in 2013.

    If your business is not incorporated, you can kick in 20% of your self-employment income (which is total business income minus half of your self-employment tax) up to the same limit. And, if you are 50 or older, you are eligible for an additional $5,500 in catch-up contributions for a total of $56,500.

    Another retirement savings option is a SEP IRA, which is good for both self-employed people and those who have side jobs in addition to their regular careers. Assuming you contribute the maximum to your 401(k) at your day job, you cannot take advantage of the $17,500 limit again with a solo 401(k). But you can open a SEP IRA for your small business or sideline business and save up to 20% of your self-employment income (or 25% of your compensation if your business is incorporated) up to $51,000.

    Although no catch-up contributions are allowed, the SEP IRA offers one advantage over the solo 401(k): you can set one up at the last minute. You have until you file your income taxes for the previous year to establish and fund your SEP IRA. With a solo 401(k), you must establish your plan by December 31, but you have until you file your tax return to fund it.

    If you have employees (other than your spouse), you aren't eligible for a solo 401(k), but you do have other options. Consider a SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees.

    In 2013, you can save $12,000 of your self-employment income and your business can kick in another 3%. People age 50 and older can tack on an extra $2,500 in catch-up contribution for a total SIMPLE contribution of $14,500.

    On your own

    You can also save for retirement on your own with an Individual Retirement Account (IRA). If you don't participate in a retirement plan at work, or even if you do and your income falls within eligibility limits, you can make tax deductible contributions of up to $5,500 to a traditional IRA in 2013, plus an additional $1,000 in catch-up contributions if you are 50 or older. If you participate in a workplace-based retirement plan, you can still make tax-deductible contributions to an IRA if you are single and your income is less than $59,000 in 2013.

    If your income is between $59,000 and $69,000, you qualify for a partial deduction. If you are married filing a joint return, the phase-out limit for deductible IRA contributions begins at $95,000 in 2013 and the write-off disappears once your income tops $115,000.

    If you don't participate in a retirement savings plan at work, but your spouse does, you can make tax-deductible contributions to an IRA if your adjusted gross income on your joint return is $173,000 or less. You can claim a partial deduction if your income is between $178,000 and $188,000. You can't deduct your IRA contribution once your income tops $188,000.

    The Roth IRA option

    While most retirement savings plans are based on up-front tax breaks, with the understanding that your withdrawals will be fully-taxable in retirement, the Roth IRA offers the opposite approach.

    You get no initial tax break, but all future earnings and withdrawals are tax-free as long as your account has been open at least five years and you are at least age 59½. Plus, since you contribute after-tax dollars, you are able to withdraw your contributions (but not your earnings) at any time, tax-free and penalty-free.

    Roth IRAs are a great option for anyone interested in tax-free retirement income, and are particularly good for young workers who could benefit from decades of tax-free growth. Roth IRAs are also good for anyone who expects to be in a higher tax bracket in retirement.

    There are, however, eligibility limits. For 2013, single taxpayers can contribute up to $5,500 to a Roth IRA, or up to $6,500 if you are 50 or older, only if your income is $112,000 or less. You can make a partial contribution to a Roth IRA if your income is between $11,000 and $127,000. Once your income tops $127,000, you are not eligible to contribute to a Roth IRA.

    For married couples, $5,500 or $6,500 contributions can be made for each spouse, if income is under $178,000; the right to make contributions is gradually phased out as income rises between $178,000 and $188,000.

    If the idea of tax-free income in retirement appeals to you, and your income is too high to qualify, there's a backdoor entrance to the Roth IRA. You can convert a traditional IRA to a Roth IRA, regardless of your income.

    If these nondeductible contributions represent your only IRA money, then you will just owe taxes on the earnings when you convert to a Roth IRA.

    However, if you have other IRA assets funded with deductible contributions, only a portion of the amount you convert will escape taxes, since all conversions must be done on a pro rata basis based on the total balance in all of your IRAs. A more generous rule exists for after-tax contributions to a 401(k). You can roll over all after-tax contributions directly to a Roth IRA tax-free.

    Employers are allowed (but not required) to offer a Roth option for their 401(k) plans. Like the Roth IRA, contributions to a Roth 401(k) are made with after-tax dollars and future withdrawals will be tax-free as long as you adhere to the rules.

    If your employer offers a Roth option, consider seriously whether you would be better off foregoing the immediate gratification of a tax break today for the delayed gratification of tax-free income in retirement. You can choose to split your contributions between a traditional and a Roth 401(k) as long as your combined contributions do not exceed the annual limits.

    Using TurboTax Deluxe will help you take advantage of retirement-related income tax deductions.

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    Tax Tips After You Retire by TurboTax

    Even if your current retirement income plan doesn't provide maximum tax benefits, you can still restructure your payment strategies to optimize your tax results.

    When you start putting money away for retirement, you might be thinking of the current tax benefits or consequences that arise from your savings options, and not necessarily how your distributions will be taxed after you retire. However, you can still restructure your payment strategies to optimize your tax results even if your current retirement income plan doesn't provide maximum tax benefits.

    Watch your Social Security and other income combinations

    If you worked for someone else or had net profits from self-employment before you retired, you're probably eligible to receive Social Security benefits during retirement. Your Social Security benefits might be taxable, depending on how much income you (and your spouse if you file a joint return) have from other sources.

    Between 50 and 85 percent of your annual benefit is taxable when the sum of one-half of your Social Security income, plus income from other sources is more than $25,000 -- or $32,000 if you're married and file a joint return; or $0 if you file separately from your spouse. To reduce the risk of paying tax on your Social Security benefits, limit your income from other retirement plans (or wages from a part-time job) to ensure that you stay within the income limit.

    Limit income from pretax retirement plans

    If you have funds in a pretax plan, such as a 401(k), withdrawals you make from the plan after you retire are subject to income tax. Your plan administrator will typically deduct 10 percent from any distribution amounts to cover taxes but, depending on your tax bracket, this may not be enough to cover your bill.

    Ultimately, your tax rate is based on all your taxable income during the year. If you have multiple sources for retirement income, you'll save on your tax bill if you limit distributions from pretax plans to only amounts you need or are required to withdraw.

    Understand your traditional IRA tax treatment

    Traditional IRA distributions may be fully, partially, or not taxable depending on how you treated your contributions before you retired. If you took a tax deduction for contributions you made to the plan in prior tax years, your distributions are taxable when you withdraw them, up to the amount you previously deducted.

    Traditional IRA contributions are made with after-tax dollars, so if you did not take a deduction for some or all of your contributions, the withdrawals you make of these non-deducted contributions are not taxable. That is because you already paid tax on the money you put in the account, and didn't receive a tax benefit for those deposits. Similar to 401(k) plans, if you deducted traditional IRA contributions from your income in earlier tax years, limit your retirement withdrawals to reduce your potential tax burden.

    Maximize your tax benefits with Roth IRA distributions

    Contributions you make to a Roth IRA account are made with after-tax dollars, and you don't have the option of deducting these contributions from your income. This makes withdrawals from a Roth IRA during retirement totally tax-free. According to IRS enrolled agent Brittany Brown, "Roth IRA withdrawals give the best of both worlds to retirees. You get regular retirement income and no income tax. This is important for seniors because there just aren't a lot of tax credits or deductions available for people who have unearned income and no longer have dependents to claim."

    Increase your retirement income options and decrease your future tax consequences by drawing from a Roth IRA or contributing to a Roth IRA for future use.

    Convert pretax plans to a Roth IRA

    If you want to move your retirement funds from one type of plan to another, the IRS allows you to do this. You can, for example, convert funds from your 401(k) account or traditional IRA account to a Roth account. Recharacterizing your funds will reduce future tax liabilities, but in the year of the conversion, you'll pay tax on any pretax funds you convert.

    Prepare for required minimum distributions

    Most retirement plans (except for Roth IRA plans) are subject to "required minimum distributions. Beginning on April 1 of the year after you reach age 70 1/2, you must withdraw a minimum amount from your retirement plan or the IRS can assess a penalty against you. If you are still working, you can delay withdrawals from 401k plans but not from IRAs. To avoid this penalty, use the RMD calculator on the IRS website to determine when you should start taking RMDs and the amount you must withdraw.

    Diversify your retirement income

    To maximize retirement income, Brown says it's important to diversify your income sources when possible. "If you have money coming from different retirement sources, try to take a little from both your taxable and nontaxable sources. You must meet your RMD requirements, but when you mix it up a little, you'll keep your taxable income margin low, and this keeps your overall tax bill low."

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