Everyone knows it's important to save for retirement. But what are the best ways to do it while minimizing the impact of taxes on your savings? These seven practical strategies can help:
1. Focus on 401(k) salary deferrals. If your employer offers a 401(k) plan, allocate as much of your salary as you can to payroll deductions. For 2017, the IRS allows you to defer as much as $18,000 of your compensation, or $24,000 if you're age 50 or over. If you've been putting in the bare minimum the past few years, it may be time to dig a little deeper. The impact of investing your contributions, which compound without current tax, may far exceed your expectations.
2. Take advantage of your employer's match. Many companies agree to match part of what you contribute to a 401(k), up to a stated percentage. For instance, your employer may match half of the first 6% of your compensation that you put into your plan. So if you earn $100,000 a year that would add $3,000 to the account each year. And while employer contributions sometimes are subject to a vesting schedule, with some money held back until you've worked for a company for several years, there's no downside to increasing your contribution to take advantage of this benefit.
3. Learn the rollover trick. If you've been building up your 401(k) or another kind of employer-sponsored account, you'll need to decide what to do with that money when you leave the job. Although you could take part or all of the payout in cash, you'll be depleting your retirement savings and owe income tax on the money you withdraw. It's usually better to leave the funds in the existing plan, transfer them to a plan at your new company, or "roll over" the funds to a traditional IRA—any of which can let you continue the tax-deferred earnings. You won't be taxed as long as you complete the rollover within 60 days. To avoid having tax withheld, which you would have to recoup on your tax return, you can arrange a "trustee-to-trustee" transfer.
4. Consider a Roth conversion. Your traditional IRA could come to represent a significant portion of your retirement savings, particularly if you've rolled over funds from other accounts. Deferring taxes on that money until you withdraw funds during retirement can be beneficial, but another approach is to convert some or all of your IRA to a Roth IRA. Though you'll have to pay taxes now on the conversion, future distributions after age 59 may be tax-free. You could spread out that tax hit by making the conversion over several years.
5. Go directly to a Roth. If you meet the requirements, you can establish and contribute directly to a Roth IRA. For 2017, the maximum contribution (to all of your IRAs, Roth or traditional) is $5,500, or $6,500 if you're age 50 or over. So if you're age 55, you could decide to contribute $4,000 to a Roth and $2,500 to a traditional IRA. The sticking point here is the income limit for contributing to a Roth IRA—in 2017, the phase-out begins at $118,000 of modified adjusted gross income (MAGI) for single filers and $186,000 of MAGI for joint filers.
6. Maximize benefits from taxable accounts. Although the tax law favors 401(k) plans and IRAs, "taxable" accounts can bring tax benefits, too. Long-term capital gains from securities sales are taxed at a maximum rate of 15%, or 20% if you're in the top ordinary income tax bracket of 39.6%. And you can use losses from asset sales to offset capital gains (both long-term and short-term) and up to $3,000 of ordinary income.
7. Balance your portfolio. Beyond choosing the right kinds of accounts for your retirement savings, it's also important to have a solid long-term plan for investing that money. Try to make sure that you strike a good balance between meeting your objectives and staying within your personal risk tolerance. Then review your portfolio choices at least once a year and adjust as needed to reflect changes in your circumstances or the performance of different kinds of assets.
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