By: Kerri Tassin
Saving for the future could result in current tax savings. Taxpayers may have the opportunity to take advantage of deductions, income deferral and possibly a tax credit, all while setting aside a nest egg that will help ensure a financially stable retirement. Knowledge can mean power when it comes to planning for the future.
According to the 16th annual Transamerica Center for Retirement Survey results released in August, workers of all ages estimate that they will need $1 million in order to retire comfortably, yet they have only saved an estimated median of $63,000. Twenty-six percent of these workers predict that they will depend upon Social Security as their primary source of retirement income. The report also stated that retirement savings for workers of all ages were relatively low.
In order to boost those retirement savings, workers might consider contributing to either a traditional IRA (Individual Retirement Account) or a Roth IRA. Individuals who contribute to a traditional IRA may be able to deduct the amount of the contribution as an adjustment to income. In addition, earnings in the account grow tax free over time. The owner of the account pays taxes on the distributions later – at the time of retirement. Taxpayers who contribute to a Roth IRA, on the other hand, will not be able to take a deduction in the year that the contribution is made, but can instead take out distributions, tax-free, at retirement.
Congress enacted the provisions for IRA contributions and the related tax benefits with the intent that taxpayers would leave those funds in the accounts until retirement age. Taxpayers should be very careful about taking early distributions from an IRA account prior to age 59 ½, as doing so could result in a penalty.
Taxpayers who contribute to their employers’ 401(k) plans may take advantage of the deferral of income. In other words, amounts that employees contribute to a 401(k) plan may reduce the amount of taxable income for the year of the contributions. In addition, earnings grow tax free in the account until the taxpayer takes distributions at retirement. Again, taxpayers should be careful about taking early distributions, as a penalty could apply.
While taxpayers may be knowledgeable concerning the above tax deductions, many do not know about a credit that is available to certain taxpayers who contribute to qualified retirement plans or IRAs. The Transamerica Retirement Survey results indicate that approximately 30 percent of workers know nothing about the Retirement Savings Contribution Credit, otherwise known as the “Saver’s Credit.”
The Saver’s Credit provides tax savings to taxpayers who earn a low to moderate income and contribute to a traditional IRA, a Roth IRA, a 401(k) plan or other qualified retirement plan. Depending upon the level of income, the credit may equal 10 percent, 20 percent or even 50 percent of the retirement plan contribution. Taxpayers may qualify to take both a deduction for a contribution to a retirement plan and the Saver’s Credit.
American workers may need to take a second look at their current retirement savings and see whether those savings could use a boost. The decision to increase those retirement savings could result in tax savings. Taxpayers may find that a deduction, income deferral, or even a tax credit makes saving for retirement easier than they thought.
This article appeared in the December 5th edition of the News-Leader and can be accessed online here.
Kerri Tassin, J.D., CPA, is director of the master of accountancy program in the School of Accountancy at Missouri State University. Tassin also is the director of the Volunteer Income Tax Assistance program and the director of the Low Income Tax Clinic at MSU. Email: firstname.lastname@example.org. The material in this article is for informational purposes only and does not constitute tax advice. Please consult with your own tax adviser regarding your personal tax situation.