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Tax Tips for a Better Retirement

Investing for retirement is one of the best options to offset your tax cost. Not only now but when you get to retirement as well. The following are just a few tax tips to help reduce your tax burden and put more of your hard-earned money in your own pocket. Remember I am not a certified accountant and you should do your own research and present all questions to your certified accountant.

Contribute to Retirement Accounts

If you have not already funded your retirement account for 2020, the easiest thing to do is to contribute by April 15, 2021. That is the deadline for contributions to a traditional IRA, deductible or not, and to a Roth IRA.

  • If you have a Keogh or SEP you can get a filing extension to October 15, 2021, you can wait until then to put 2020 contributions into those accounts.

To start tax-free compounding as quickly as possible, however, don’t wait until these deadlines to make your contributions.

Making a deductible contribution will help lower your tax bill this year. Plus, your contributions will compound tax deferred. This is the best tax tool in existence.

If you put away $5,000 a year for 20 years in an investment with an average annual 8% return, your $100,000 in contributions will grow to $247,000.

The same investment in a taxable account would only grow to about $194,000 if you’re in the 25% federal tax bracket (and even less if you live in a state with a state income tax to bite into your return).

To qualify for the full annual IRA deduction in 2020, you must:

  • not be eligible to participate in a company retirement plan, or

  • if you are eligible, you must have adjusted gross income of $65,000 or less for singles, or $104,000 or less for married couples filing jointly.

  • If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible if your combined gross income does not exceed $196,000.

  • For 2020, the maximum IRA contribution you can make is $6,000 ($7,000 if you are age 50 or older by the end of the year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2020 is $57,000.

Although choosing to contribute to a Roth IRA instead of a traditional IRA will not cut your 2020 tax bill—Roth contributions are not deductible—it could still be the better choice because all withdrawals from a Roth are tax-free in retirement.

Withdrawals from a traditional IRA are fully taxable in retirement. To contribute the full $6,000 ($7,000 if you are age 50 or older by the end of 2020) to a Roth IRA, you must earn $124,000 or less a year if you are single or $196,000 if you are married and file a joint return.

The amount you save for contributing will vary. If you are in the 25% tax bracket and make a deductible IRA contribution of $6,000, you will save $1,500 in taxes the first year. Over time, future contributions will save you thousands, depending on your contribution, income tax bracket, and the number of years you keep the money invested.

Itemize your tax deductions

It’s easier to take the standard deduction, but you may save a bundle if you itemize, especially if you are self-employed, own a home or live in a high-tax area.

Itemizing is worth it when your qualified expenses add up to more than the 2020 standard deduction of $12,400 for most singles and $24,800 for most married couples filing jointly.

Many deductions are well known, such as those for mortgage interest and charitable donations.

You can also deduct the portion of medical expenses that exceed 7.5% of your adjusted gross income for 2020.

File electronically and use direct deposit

I cannot believe it but… the IRS says that paper-filed tax returns and paper checks will take even longer this year. One out of five taxpayers do not get their tax refunds by direct deposit. Filing electronically and choosing direct deposit is important to get you refunded promptly.

Stimulus Payment True Up

Most taxpayers got two economic impact payments in Round 1 and Round 2. If you are eligible—and either did not receive a payment or think you qualify for more than you got—you can claim a Recovery Rebate Credit on your 2020 tax return. If your income was lower in 2020 than 2019, you may be owed a partial credit.

Unemployment Benefits Are Taxable

Unemployment benefits are taxable. This includes basic state benefits as well as the extra $600 weekly CARES Act federal pandemic benefits. Some states are providing tax relief for the state tax hit on unemployment benefits.

Roth IRA is the Best Deal in Tax Relief

Remember you can utilize your IRA and/or your Roth IRA in investment deals to reduce your tax burden not only now but when you get to retirement. If you are currently earning less than 7% on your IRA or your Roth IRA feel free to reach out for more information. Our goal is to not only get you a high rate of return safely, but to help you keep more of your own money. If we do not have an answer to your question, we will get an answer. In my opinion the Roth IRA is the best deal in tax relief for your retirement plan.

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