Year-end Tax Benefit Strategies
With just a few days left in the year, it is not too late to max out a retirement, college and/or other tax savings account. For your IRA, you have until tax day (April 15) of 2013 to max out – although for some retirement and tax saving plans, the deadline is Dec. 31. Contributing as much as you can into these accounts is a great way to lower your taxes while taking advantage of great tax benefits for the future. Here are some tips to take advantage of before the end of the year.
* Business Retirement Accounts. If you have a 401(k), you can contribute up to $17,000 for 2012, with an additional $5,500 for a catch-up contribution if you are over age 50. Especially if your employer has a matching program, it is important to take advantage of the free money! Don’t forget to take into account the last paycheck of the year that you may receive in January when maximizing your 2012 contributions. If you are a small-business owner, you can set up a SEP or SIMPLE IRA for 2012 until the due date of the business return (March 31) or extension date (Sept. 15). If the business makes enough money, you can set aside up to $50,000. If you have a handful of employees, you can set up a defined benefit plan by Dec. 31. You can put away up to $150,000 or more a year into this plan, and also cover certain employees. Talk to a professional to see which one is right for you.
* Individual Retirement Accounts (IRAs). Even if you have maxed out your 401(k), you can double up your retirement savings and put money in a Roth or Traditional IRA. Depending on your income level, you may not be able to deduct contributions to your traditional IRA, but it will still grow tax deferred, so there is still a great benefit to doing it. The max is $5,000, with an additional $1,000 of catch-up.
* College and Trust Accounts. You also can contribute to an educational savings account (Coverdell) or 529 College Account for a beneficiary’s education expenses. For both accounts, the money is tax-deferred and tax-free when used for qualified educational expenses. The max for the Coverdell is $2,000, and the 529 depends on the plan. The 529 contributions also can be partially deducted for state taxes. For trust accounts, you can contribute up to $13,000 per person per year for your beneficiaries without having to pay a gift tax.
* Health Savings Account (HSA). These accounts are part health savings account and part retirement account. You can contribute to an HSA if you have a high deductible health plan (HDHP). Contributions are tax-deductible, earnings are tax-free, and distributions for qualified medical expenses are tax- and penalty-free. Maximum contribution for a family is $6,250, and for an individual is $3,100. If you don’t use it you can continue to contribute for tax-deferred growth.
Understanding investment and tax strategies can help your bottom line now while preparing you financially for the future. Be sure to talk to a professional for more information. You also can check out artofthinkingsmart.com for more investment and tax strategies!