Any extra funding you can allocate to a retirement portfolio not only boosts your income once you stop working, but can also help you lower the amount you pay in taxes.
IRAs Provide Another Retirement Option
If you do not have a traditional IRA, consider opening one, because any contributions you make before April 15 are deductible for your 2014 taxes. IRAs are a good option for consumers to save even more money for their retirement and offer a wide variety of investment options from mutual funds to ETFs.
For 2015, a person may be able to contribute up to $5,500 to an IRA, plus an extra $1,000 if he or she is 50 or over. Depositing $5,500 a year for 25 years in an IRA that earns 7% a year would hypothetically add nearly $375,000 in assets, said Joe Jennings, senior vice president of PNC Wealth Management in Baltimore.
“Tax season is generally a good time to conduct a comprehensive review of one's financial health,” he said. “Upon the completion of your tax returns, you have a great snapshot of your sources of income and may have a partial snapshot of your liabilities.”
If you are self-employed and filed for an extension on your taxes, you have until October 15 to contribute, said Anthony Criscuolo, a certified financial planner with the Palisades Hudson Financial Group in Fort Lauderdale, Fla.
“If you’re self-employed and don’t have the cash to contribute by April 15, you can get six more months,” he said. “Apply for an automatic six-month extension to file your return, but you will have to pay any taxes due by April 15.”
Fund Your 401(k) To the Max
If you have more than one 401(k) from a past employer, consider either rolling them over into your current 401(k) or consolidating into an IRA. Many IRAs provide greater diversification because they have a larger amount of investment options to choose from than the choices 401(k)s offer.
“This bit of housecleaning can simplify how you track your finances and perhaps even reduce fees,” Jennings said.
Beef up the 401(k) contributions from your paycheck. If you got a raise to begin the new year, consider increasing your contributions instead of spending it, Jennings said. If you're not already contributing the maximum, which is 18,000 for those under age 50 and $24,000 for older workers in 2015, consider increasing contributions for the rest of the year.
Invest in Tax-free Accounts for Healthcare
If you spend money on a regular basis for prescription drugs or to see a doctor, check out your company’s current flexible spending account (FSA) rules. The rules are now more flexible and work with consumers. Starting in 2014, employers could allow their participants in to carry over up to $500 to next year, rather than forfeit the unspent funds. Other company plans have a grace period rule allowing participants until the middle of March 2015 to spend 2014’s flex money, so check to see which option your employer chose.
Health Savings Accounts (HSA) are another good option to pay for your healthcare needs. Like 401(k) retirement plans, HSA contributions are deducted pre-tax from your paycheck and withdrawals for approved medical expenses are tax free. One of the qualifications for opening an HSA is having a high deductible health insurance plan.
If you already have an account through your employer or one you purchased independently, consider increasing your contributions. In 2015, contribution limits are $3,350 for an individual and $6,650 for a family, but HSA holders 55 and older may save an extra $1,000.
Money in an HSA can be used to pay for over the counter medication such as aspirin or allergy pills, eye glasses, contacts and solutions, medical mileage and long- term care insurance premiums, said Eric Rothenberg, a tax attorney in Needham, Mass.
“If you have an opportunity to open an HSA, it is an amazing tax saver,” he said. “It’s your money to keep forever and doesn’t revert back to your employer if you don’t use it like a FSA."
Once you turn 59.5, the HSA acts like an IRA and you can take it out to spend on anything, but it will be taxable income.
--Written by Ellen Chang for MainStreet