10 tax strategies that will help you save more for retirement

Chapter 46: 10 tax strategies that will help you save more for retirement

If you need additional money to save for retirement, taking a fresh look at your tax situation will help. Here are some simple — and often little-known — things you can do to reduce your taxes. Put the money you save on taxes toward your retirement.

Tip #1:

Give yourself a raise.

If you consistently receive a big tax refund, it means that you’re having too much money taken out of your paycheck for taxes every payday. Allowing this to happen is like loaning the government money. Money held by the government is money that’s not earning returns for you in your IRA, 401(k) or other retirement account. Remedy this by filing a new W-4 form with your employer that will reduce the amount withheld for taxes each pay period. It will ensure that you get more of your money when you earn it. You can put it into savings right away so it can start earning returns for you immediately.

Tip #2:

Boost your retirement savings.

Increasing the amount you save in your IRA, 401(k) or similar retirement savings plan will lower your taxable income. This reduces the amount you pay in taxes. Money you save on taxes is money you can put toward retirement. Can you see how saving more gets you more money to save? Your tax or financial advisor can help you find the right amount to set aside to optimize both your retirement and tax situations.

Tip #3:

Be a tax-smart retirement saver even if you’re self-employed.

Just because you work for yourself doesn’t mean you can’t enjoy the tax benefits associated with saving in a 401(k) or similar workplace plan. If own your own business, you have several choices of tax-favored retirement accounts, including Simplified Employee Pensions (SEPs) and Individual 401(k)s. Contributions to them can reduce your tax bill now and earnings grow tax-deferred for retirement. Your financial advisor can guide you to the account type that’s right for you.

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Tip #4:

Get a (tax) break on health care costs.

Whenever possible, use tax advantaged vehicles to pay your health care expenses. This is particularly important as you get older and your costs for medical care increase.

If your employer offers a medical reimbursement account — sometimes called a flex plan — take advantage of it. These plans let you divert part of your salary to an account which you can then tap into to pay your medical bills. Why do this? Because you avoid paying both income and Social Security taxes on the cash you put into the account. This gives you tax-free money to spend on your health care. Remember: Set aside some of the money you save on healthcare for retirement.

Tip #5:

Don’t let the government take your inherited 401(k) money.

One way to increase your retirement savings is by inheriting a 401(k) from a parent, grandparent, family member or friend. However, you could lose a lot of the money in the plan to taxes if you don’t handle things correctly. Until recently, rules required people to cash-out the 401(k) account and pay all the taxes on the proceeds within five years. The fast timeframe caused a significant tax drain on assets.

A recent change allows you, if you’re the beneficiary, to roll over the inherited 401(k) into an IRA and stretch the payouts — and the taxes on those payouts — over your lifetime. To qualify for this break, you must be named as the beneficiary of the 401(k). If you’re not and the account goes to the owner’s estate and then to you, the old five-year rule applies. If you think you could inherit 401(k) assets from someone, check to see that beneficiary designations are being handled correctly before it’s too late.

Tip #6:

Hiring your kids could save you in taxes.

If you run an unincorporated business (including an online one), hiring your children can have big tax advantages. You can deduct what you pay them, shifting income from your higher tax bracket to their lower one. This is another novel way to “find money” to save for retirement. Another thing: If your child is under age 18, he or she does not have to pay Social Security tax on the earnings.

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Tip #7:

Get a break on paying child care expenses.

If you still have young children at home and your company offers a child-care reimbursement account, make sure you contribute to it. It lets you set aside pre-tax dollars to pay your child-care expenses. You avoid paying both income and Social Security taxes on the money you put into the the account. This can make your child-care dollars stretch a lot farther, which can give you more to save for retirement.

Tip #8:

Deduct expenses related to finding a new job.

Believe it or not, you can write off costs associated with finding a new job from your taxes. As long as you’re looking for a new position in your same line of work, you can deduct job-hunting costs (within limits) including travel expenses such as the cost of food, lodging and transportation, if your search takes you away from home overnight. Remember to keep careful records. Use what you save on taxes for your future “ultimate job”: retirement.

Tip #9:

Deduct expenses to move closer to a new job.

Believe it or not, if you take a new job that is at least 50 miles away from your home, you can deduct the cost of moving to a home closer to your new job from your taxes. This includes expenses related to moving yourself and your belongings. If you drive your own car, you can write-off mileage, plus parking costs and tolls.

Tip #10:

Take control over when you earn income.

Here’s another tip for people who own businesses. If you do, you have a lot of flexibility at the end of the year. You control how much income you bring in during that period, which can increase or decrease your total income for the year, impacting the amount you pay in taxes. To keep your income lower, push when you receive it into the following year by delaying sending bills to clients until late in December so payment is received after December 31. You can also pay business expenses before January 1 to lock-in deductions.

Do you find the flexibility associated with owning your own business appealing? Find out how easy it can be to start one online. Working online offers the ultimate in flexibility: You work when and how often you want to earn the money you need. Learn more now!

Believe it or not, we found ten more ways for you to save on taxes. Check them out in the chapter 47.

 

If you liked this article, then you might also like these:

How You Can Control Health Care Costs in Retirement

The Best Time to Start Saving for Retirement?

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