TEMPLE, Texas — Paying yourself in a retirement fund is still one of the best ways to lower your taxable income amount, Certified Financial Planner Neil Vannoy explained.
"One of the easiest tax deductions you can still take for 2020 is to contribute to a traditional IRA. The maximum contribution is $6,000 or $7,000 and if you're age 50 or older, the contribution deadline is April 15 and tax-deductibility will depend on things like your income level, filing status and whether or not you have a retirement plan at work," Vannoy said.
Health savings accounts also lower your taxable income and build wealth.
"If you have a high deductible health insurance plan you might be eligible to contribute to a Health Savings Account, or HSA. Contributions are tax-deductible, money inside an HSA isn't subject to taxes, withdrawals for qualified medical expenses are tax-free and the balance can be rolled over to future years," Vannoy said. "Also, individuals can contribute up to $3,600 and families can contribute up to $7,200, and you can contribute an extra $1,000 if you're over 55. Just like IRA’s, contributions to HAS’s for the 2020 tax year must be made by April 15."
Of course, we haven't forgotten about small business owners. Those taxes can be very complicated, but owners can also invest to save on their tax bill.
"If you're a business owner, there is still time to set up and fund a simplified employee pension plan or SEP IRA. The maximum contribution for 2020 is 25% of your wages up to a maximum of $57,000, so this has the potential to be a huge deduction. If you have employees you have to contribute the same percentage to their SEP IRA’s as you contribute to yours, so keep this in mind when deciding how much to contribute. Contributions to SEP’s can be made by your tax-filing deadline including extensions, so you could potentially have up until October 15th to take this deduction," Vannoy explained.
But what if you are just an average worker that has a company retirement matching plan? Should you change your tax situation going forward?
"One thing you can do now to help with your 2021 taxes is to contribute to employer-sponsored retirement plans like a 401(k) or 403(b). If your employer offers one. contributions to these plans can be tax-deductible, but you have to make contributions during the tax year to get the deduction unlike traditional IRA’s that allow contributions for the prior tax year," Vannoy said.
According to the national compensation survey, 56% of companies offer a retirement plan. About 41% of those companies offer a matching donation, something that employees definitely want to take advantage of.
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