Retirement resource: A column by David Boike
Did you write a check to the IRS?
May 12, 2010 - As April 15 came and went, many people had taxes on their mind, especially those who wrote a check to the IRS instead of receiving a refund.
Not planning ahead or forgetting common deductions can make tax time a painful time, but there are a few strategies you can use in the short-term and long-term, to help you save on your annual income tax return.
For the short-term (five years or less) consider:
Utilizing tax-deferred investments or savings vehicles, as these allow you the opportunity to pay taxes on your money only when you need it.
This type of investment or savings vehicle, such as a fixed-annuity, reduces your annual tax liabilities because you pay only when the money is withdrawn or otherwise distributed.
Saving for retirement has a couple great benefits, not only do you save for your future, but you get some tax deductions as well, since contributions made to 401(k)s or traditional IRAs are tax deductible. Catch-up contributions for 401(k)s and IRAs, which are an option for retirement savers who are 50 years and older, are tax deductible as well and allow those eligible retirement savers to contribute extra money in order to "catch-up" on their retirement savings.
The extra amount you're allowed to contribute depends on what type of plan you have so check with a plan administrator for more information.
For the long-term (more than five years) consider:
Converting to a Roth IRA, now that the income restrictions have been lifted, allows almost anyone (no matter their income) to convert to this tax-free growth retirement savings vehicle.
Roth IRAs are considered a wise tax strategy because when you contribute you are taxed up front and if tax rates go up in the future, as they're expected to do, paying at a lower rate today might be a significant money saving move.
This strategy works best when you're further away from retirement and don't anticipate needing the funds in your retirement account for several years.
Laddering your retirement accounts so the maturity date of tax-deferred savings or investment accounts (other than traditional retirement savings plans) pay out at different times can help you avoid a future tax bomb.
Accounts that are considered tax-deferred, such as fixed-annuities or municipal bonds, and tax-free accounts, such as Roth IRAs, both work to keep your annual taxable income to a minimum in retirement.
While tax time can be a taxing time, there are simple ways to reduce your annual liabilities. Keep track of your deductible items and look and see where reallocation can help reduce income taxes now and in the future.
David Boike owns Retirement Resources tax, mortgage, and financial consulting practice in Clarkston with his sons, D.J. Boike and Jake Boike. Call 877-732-5751.