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Today’s post comes courtesy of Rick Pendykoski, owner of Self Directed Retirement Plans LLC. If you have questions about effective retirement and tax planning, Rick has answers!
Tips for Effective Retirement and Tax Planning
The future is unpredictable, especially when it comes to your finances. Unexpected circumstances could affect your ability to handle financial responsibilities (both today and tomorrow), which is why many people look for professional assistance with their retirement and tax planning needs while they’re still young and earning a steady income.
Check out these sound tips for tax planning as well as retirement savings, which are typically shared by industry experts and advisors:
Make the Most of 401(k) Plans
Very few people understand 401k plans well enough to make the most of it. This is a basic retirement plan, where your contributions may be matched by your employer (you should definitely be using this to your advantage, since it’s free money for your retirement fund!).
Future payouts are dependent on the amount of contributions you make (up to $19,500 annually and after the age of 50, another $6,500 per year in catch-up contributions). When you face a crunch, look into cutting other costs rather than sacrificing 401(k) contributions, since you will pay income tax on the money you didn’t put into it!
Invest in IRAs Too
If you already own an individual retirement account (IRA), you won’t have the flexibility to put away a lot of funds every year, since the annual contribution limit is $6,000 with an additional $1,000 catch-up contribution for those over 50.
However, it’s essential to make the maximum contribution possible each year, as well as benefit from the catch-up provision after you turn 50, so you can pad your retirement nest-egg even further. Consider investing in a Self-Directed IRA, since distributions from this account will be tax-free after retirement.
Invest in Real Estate and Budget Realistically
Owning a home will free you from worrying about ever-increasing rental rates after you retire. If you can pay off your mortgage before retirement, your only housing expense in retirement will be property taxes.
Also, plan your retirement budget taking inflation into account, rather than deciding on a certain fixed sum (which may not be enough to cover rising costs of living). This is where it might make more financial sense to invest money in high-yield investments instead of fixed low-interest mortgage payments, so consider this option too.
Cut Your Tax Bills
The key to tax planning is to begin in the ongoing tax year, so you can keep better track of tax cycles and avoid penalties. Put the dates of your tax payments on a calendar and keep tracking your expenditure to understand where you can cut costs and look into legal ways to lower your tax burden.
For instance, well-planning tax loss harvesting can help you save money on taxes as well as aid in portfolio diversification.
Gifting
If you are involved in charity work, you can get a reduction in your income tax. The tax saving works even better if both you and your spouse gift money to charity, since individually, you can each gift a certain amount to an individual every year.
Business expenditures
If you’re a business owner, deducting some business expenses out of your income allows you to reduce your taxable income. Make sure you take these deductions before the end of the calendar year if you want to claim them in the current tax year.
529 contributions
These are educational savings contributions, and some states offer you the option of making deductions against your state income tax, based on your contributions to a 529 plan. The funds may not necessarily be for yourself but may be invested in 529 plans to help pay for your kids’ college costs!
Retirement and tax planning are very important for a secure and worry-free future. Starting early can help you bring them on track, so don’t waste any time!
About the Author
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning. Over the last 10 years has turned his focus to self-directed accounts and alternative investments.
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