Want to reduce your tax bill? Consider boosting your retirement savings. That way, you’ll be paying your future self instead of the government. We’re not advocating that you stash your money in the Cayman Islands, but why pay more in taxes than you need to? Instead, set yourself up for a comfortable retirement and reap the benefits when tax time rolls around.
Check out our 401(k) calculator.
Let’s be clear: finding yourself in a high tax bracket with a hefty tax bill is, quite literally, a “rich person problem.” But hey, problems are problems. If you want to reduce your tax bill, one good way of doing so is to save, save, save.
Max Out Your 401(k)
Contributions to your company’s 401(k) immediately lower your taxable income. If you can afford to max out your 401(k) contributions and you’re not doing so, now is the time to consider it. This is especially true if maxing out your 401(k) would knock you into a lower tax bracket. Just make sure that the fund you’ve chosen for your 401(k) contributions has low fees.
Max Out a Traditional IRA
The same taxable income-reducing principle applies to a traditional IRA as to a 401(k). When you contribute to a traditional IRA, you can deduct those contributions from your income at tax time. This will lower your tax liability now, though you’ll pay taxes when you withdraw money from your IRA in retirement.
The amount of your IRA contribution that’s deductible depends on a) your income and b) whether you or your spouse (if you’re married and filing jointly) has a retirement plan through work. If you’re single and don’t save for retirement through your employer, you can make a tax-deductible contribution of up to $5,500 regardless of your income.
Consider the SEP-IRA
If you’re a small business owner, sole proprietor or consultant, contributing to a SEP-IRA is a great way to lower your taxable income. If you can employ your spouse and/or children, you can shift wealth to them while lowering the family’s tax liability. Everybody wins!
Related Article: What Is a SEP-IRA?
Don’t Forget to Give
If your income and phase of life make giving away large sums of money an appealing prospect, doing so can be a great way to save on taxes. Giving money to your children isn’t an official retirement plan, but if you’re expecting your kids to help you out in your later years, giving them a financial cushion probably won’t hurt.
Have you been paying more in taxes than you’d like to? Try the strategies above to cut your tax bill and enjoy a richer retirement.
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