Many times, the single biggest tax-saving strategy is in the area of retirement plans. The following strategies relate to tax savings using retirement plans such as 401(k) plans, 403(b) plans, and IRAs.
- Required Minimum Distributions
If you were 72 or older in 2021, you must take an RMD during 2022. Those who turn 72 in 2022 have until April 1 of 2023 to take their first RMD but may want to take it by the end of 2022 to avoid having to double up on RMDs in 2023 (which could put you in a higher tax bracket).
- Fully Fund Your Retirement Plan
Fully funding your company retirement plan with pre-tax dollars will reduce current year taxes, as well as increase your retirement nest egg. For 2022, the maximum 401(k) contribution you can make is $20,500 ($27,000 if you are age 50 or older). If you have a SIMPLE IRA, the maximum pre-tax contribution for 2022 is $14,000 ($17,000 if you are 50 or older).
In 2023, the limits jump to $22,500 for a 401k ($30,000 if age 50 or over), and $15,500 for a SIMPLE IRA ($19,000 if age 50 or over).
- SEP IRA Contributions for Self-Employed Individuals
If you are self-employed, you can contribute to a SEP IRA. The limit for 2022 is 25% of your net earnings from self-employment, not to exceed $61,000. The deadline for these contributions is the date you file your 2022 tax returns, including extensions. In other words, you have until September 15, 2023 if you are a corporation or partnership or October 15, 2023 if you operate your business as a sole-proprietor to make contributions for 2022. This can be an excellent “after-the-fact” planning tool for self-employed individuals.
- IRA Contributions
Contributions to an individual retirement account (IRA) may be deductible. The maximum contribution amount for 2022 is $6,500 ($7,500 if over 50 years old). The deadline to make these contributions is April 15, 2023. There are phaseouts based on income for the IRA to be deductible. But even if you are not eligible to deduct contributions, contributing after-tax money to an IRA may be advantageous because it will allow you to later convert that traditional IRA to a Roth IRA and those earnings grow tax-deferred. Qualified withdrawals from a Roth IRA, including earnings, are free of tax, while earnings on a traditional IRA are taxable when withdrawn.
Remember that a spousal IRA can be set up for a non-working spouse as well as for the working spouse.
- Rolling Traditional IRAs to a Roth IRA
If you have a traditional IRA or Roth 401(k), you may want to consider whether it makes sense to convert all or some of it to a Roth IRA this year. You’ll have to pay tax on the amount converted as ordinary income, but subsequent earnings will be free of tax. This is a great strategy if you are in a low-tax bracket this year and have a while until you retire (to let those balances accumulate tax free). Note: The deadline for a 2022 conversion is December 31, 2022.
- Strategic IRA Withdrawals
If you require distributions from your IRA or employer retirement plan but are not yet 59-1/2, consider setting up distributions using the “Substantially Equal Periodic Payments” rule that allows these distributions to escape the 10% penalty.
- Consider Your Tax Brackets for IRA Distributions
If you need to take a larger retirement plan distribution, think about taking your distribution over two tax years instead of all at once. Some of the distribution may be taxed at a higher tax bracket if you do it all at once and spreading it out over two years may save in taxes.
Many of these tax and financial planning strategies are best implemented through a complete tax or tax and financial planning session. Want to discuss planning? Book a time to discuss tax and/or financial planning today!