I know we're all pretty excited about seeing what the New Year will bring, but I also know that some of this excitement is dampened by the fear of Tax Season. It always happens that the first quarter of the New Year brings on some anxiety as to how we'll do during this season. If I can recommend a good time of the year to visit with your financial person, it would be now after you received your 1099's and W-2's at the end of January and you're crunching numbers.
Once you have determined if you are going to do the short form or itemize, there are a few things you maybe able to consider that may reduce your tax ability. Now, I'm not giving you tax advice, that's left to other professionals, but when it comes to investments there are some options for you to consider. Let's talk about IRA's.
IRA stands for Individual Retirement Account. It is something you can set up on your own whether you have other retirement programs or not. If you have an income and you're not older than 70½, you can set up an IRA. There are IRA's that grow tax-deferred and IRA's that grow tax free. You need to determine if you want to pay taxes now or later when you take the money out. This is the biggest decision you need to make now. Let's explain the IRA's available to you.
The first IRA most people are familiar with is the Traditional IRA. This IRA's growth grows tax-deferred from the money you put into it. The government limits maximum contributions to IRA's up to $6,000/year if you are under the age of 50, or $6,500/year if you are over 50. This difference is known as the Catch-Up clause for people who want to get as much into their IRA's before they need to start taking the money out.
If you are looking to reduce your AGI, (adjusted gross income) before the year ends, this IRA can help. It is not a dollar for dollar reduction, but often, it does help reduce your tax liability.
The other popular IRA that I recommend, especially for the younger generations is the ROTH IRA. This IRA does not give you a write-off to reduce your tax liability NOW, but since it grows tax-free after a 5-year holding period, it is a good vehicle to help you minimize your taxes in the future. You can use the tax bracket you're in today to position yourself to take advantage for the future.
Remember, whatever IRA you decide to invest in, it must be funded by the end of tax season; April 17th this year due to Emancipation Day being recognized on Monday, the 16th.
Either of these IRA's can be established with small minimums. If you already have an IRA, your contribution amount can be whatever it needs to be up to the limit to help you with your taxes. Most companies don't require a minimum amount on additional investments.
Do your taxes to get an idea of where you are with the final figures, then seek some help to get those figures more in line with the result you are looking for. Once you feel you have done your best, you can move on with getting your taxes finalized. You can feel more in control as you move into the year because you have your budget planning skills behind you, and you can improve your year by doing things now to help you with tax situations throughout the year.
Soon we will talk about a concept called "The Benefit of Time". It is an important concept especially for young people just starting out in the investment world. It explains how compounding works and how it makes their money grow over time. If you yourself have a 401K, 403b, or 457 plan, or any other retirement plan linked to your employment, you can see growth within your plan throughout most years. The longer you keep your plan, the more it has a chance to grow. This is the concept we will be talking about next.
I hope you have a good tax season. I'm here if you need any help with funding your investments.
**If you are interested in previous months' articles, please go to our website:
www.wildewealth.com/p/symons-wealth, all the articles are there. Take a look at what you may be missing!
Articles you may have missed:
August: Money and Your Emotions
September: Childhood memories about Money.
October: Budgeting for the Holidays.
November: Budget for the New Year
December: Expenses You Incur Every Year But Don't Happen Every Month in Your Budget