You only have a few weeks left to make a 401(k) contribution
that will get you a tax deduction on your 2014 return. The deadline is
also rapidly approaching for retirees to take required minimum
distributions from their retirement accounts. Here's a look at the
retirement planning moves you need to make before the end of the year.
Make last-minute 401(k) contributions.
Workers age 49 and younger can contribute up to $17,500 to their 401(k)
plan in 2014. Income tax won't be due on the amount deposited in a
traditional 401(k) account until the money is withdrawn. An employee in
the 25 percent tax bracket who is able to max out his 401(k) would save $4,375 on his federal income tax bill, compared with $1,250 in tax savings
for someone who deposits $5,000 in a 401(k). Contributions are
typically due by Dec. 31, but it's a good idea to avoid waiting until
the last minute. "You can't call on Dec. 29 and say you want to put in
an extra five grand," says Joyce Streithorst, a certified financial
planner for Frisch Financial Group in Melville, New York. "They need to
have a little lead time of at least one paycheck and sometimes two." In
some cases, you can also allocate part or all of a year-end bonus to
your 401(k) account and avoid the extra tax bill on it. Workers age 50
and older can contribute an extra $5,500 to a 401(k) account as a
catch-up contribution in 2014, or a total of $23,000.
Extra time for IRA contributions.
While 401(k) contributions typically need to be made by the end of the
calendar year, you have until April 15, 2015, to make IRA contributions
that count toward tax year 2014. "For a lot of my clients, we wait until
2015 because we want to see what their tax return looks like," says
Robert Reed, a certified financial planner for Partnership Financial in
Columbus, Ohio. "We can see if it will make more sense for us to do a
traditional IRA and get the tax break this year or do a Roth IRA and pay
the tax this year and then not pay tax again ever." You can type a
hypothetical IRA or Roth IRA contribution into tax preparation software
to see how much you could save on your tax bill.
However, if you wait until 2015 to contribute to an IRA for tax year
2014, make sure you specify which tax year the contribution should be
applied to. Financial institutions may automatically apply contributions
to the calendar year when they are received unless you indicate
otherwise.Take your required minimum distributions. Distributions from traditional 401(k)s and IRAs are required after age 70½, and income tax will be due on each withdrawal. The penalty for missing a distribution is a 50 percent tax on the amount that should have been withdrawn. You have until April 1 of the year after you turn 70½ to take your first required minimum distributions, but subsequent distributions are due by Dec. 31 each year. And if you delay your first distribution until April, you will then need to take two distributions in the same year, which could result in an unusually high tax bill. "If you have to take two distributions in that year, you may want to be careful because it could push you up into a higher tax bracket," Reed says. "You're just looking at a difference of a few months, so for the vast majority of people, when you get to be 70½, just take it."
Get the saver's credit. Workers who earn up to $30,000 for individuals, $45,000 for heads of household or $60,000 for married couples in 2014 and save in a 401(k) or IRA are eligible for an additional tax perk, the saver's credit. This valuable tax credit available to moderate-income households can be worth as much as $1,000 for individuals and $2,000 for couples, with the biggest credits going to people with the lowest incomes who manage to save for retirement.
Reset your contributions for 2015. In tax year 2015, the 401(k) contribution limit will increase by $500
to $18,000, and the catch-up contribution limit will also grow by $500
to $6,000. So if you can, consider setting your 401(k) direct deposits a
little higher next year to get the biggest retirement savings tax break
you can. "Make sure you take full advantage of your 401(k), especially
if there is an employer match," says Gwen Gepfert, a certified financial
planner and principal of Oaktree Financial Planning in Basking Ridge,
New Jersey. You can even use part of your 2014 tax refund to get a
jump-start on saving for next year.
Culled from US news
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