Is Tax Time the Right Time to Think About Retirement Savings?
Tax time is here and for many this presents an opportunity to assess if there are opportunities to reduce taxes. Let’s start with your retirement savings. If saving more for retirement is on your list of goals, right now is a particularly good time to put that thought into action.
And that’s because you can attribute any contribution you make to a Traditional IRA before April 15, to the 2020 tax year.
Put another way, when you complete your tax return for 2020, you may be able to deduct from your income a contribution made now, lowering the amount of taxes you owe.
This year, you can contribute a total of $12,000 to your Traditional IRA … $6,000 for tax year 2020 and another $6,000 for tax year 2021. (You can contribute up to $7,000 per year if you are at least 50 years old.)
Let’s not forget our good friend the Roth IRA account! Contributions to a Roth account are not tax-deductible, but as with a Traditional IRA, you can make a contribution for 2020 right up to April 15 of this year. If you know that your income tax bracket will be higher in retirement, or you simply want to hedge against that possibility, diversifying your retirement savings to include funds that you can withdraw tax-free makes sense. (The rules about contributing to an IRA are available on the IRS website here.)
Whether Traditional or Roth, using your IRA for your retirement savings is a smart move. Consider this simple example: If you are in the 24% tax bracket and invest $6,000 annually for 20 years (assuming a 6% rate of return), your ending balance will be more than $31,000 higher if you do so within an IRA account, rather than a taxable account.
Balancing competing priorities can be a challenging personal finance decision. Saving more for retirement is a commitment that you must make within the context of other financial goals. Determining how much you need to save for the future that you envision can also be quite tricky. To your benefit, Your Money Line, a free resource to Pension Fund members, has experts on-hand to help you explore your options and assist you in creating a plan to meet our objectives.