Barely two weeks to go for the New Year and you have a lot of retirement planning deadlines to meet. Whether you are in your active earning years or on the brink of retirement, these tips will help you avoid penalty and qualify for income tax credits and deductions if you take action before the year ends. Follow these four golden rules and make your post-retirement life happy and financially secure:
Make 401(k) Contributions before December 31
401(k) contributions are typically due by December 31 and employees can contribute up to $22,500. Those who are 50 years or older can make an additional contribution of $7,500 and raise the amount to $24,000. An investor,who has crossed 50 and falls in the 25 percent tax bracket, can save up to $7,500 on the federal income tax bill by maxing out his traditional 401(k) plan. Even if the contribution is as small as $5,000, the savings can go up to $1, 250.
Take Advantage of Minimum Distributions
If you are born on or before July 1, 1945, you are required to take minimum distributions from your 401(k) plan before the year ends. The required minimum distribution is calculated on the basis of your life expectancy, the age of your spouse, and your account balance. You can also use an online calculator to determine your specific required minimum distribution. If you don’t withdraw the amount or withdraw less than the amount you should be taking, you would invite a huge federal penalty of 50% on the difference amount. Those who have reached the age bracket of 70½ by the end of 2015 can delay the first minimum distribution to April 1, 2016, under a special provision.However, those who delay their first required minimum distribution are required to take two distributions in a single year as the second distribution cannot be delayed any further than December 31. This will not only push you to a higher tax bracket but also make you pay more taxes.
Make Additional Contributions to Your IRA with the Extra Time You Have
You can contribute up to $6,500 by April 15, 2023.Those who are above 50 can raise the contribution amount by $1,000 and decrease the income tax liability. You can choose to pay your taxes to the government now or wait until the withdrawal of your retirement fund. This will reduce your taxable income and increase your retirement savings. The extended deadline of April 15 also applies to Roth IRA contributions.
Prepare In Advance for the Coming Year
The contribution limits for a traditional IRA and 401(k) will remain the same in the coming year. If, for any reason, you could not max out your investments in 2022, you should raise the bar in 2023. You can divert a part of your raise or the year-end bonus you receive to your retirement account if you want to lower your tax bill.
The tax savings you make are just as important as the reserves you generate from your investments. Always evaluate your income tax liabilities before finalizing your options. Following these tips will help you strike a perfect balance between income generation and tax savings.