How To Squeeze More From Your Paycheck for Retirement
If you’re thinking about retirement, even if it’s still quite a ways away, it’s important to start planning. One way to do this is to look at your paycheck and see if there are new or more ways to make your money work harder for you.
This doesn’t necessarily mean setting a higher paycheck withholding to reduce your tax burden. Instead, it means taking advantage of possible tax breaks and tax-deferred retirement accounts, helping you save more for retirement and still get tax benefits.
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If you’re looking for ways to squeeze more from your paycheck for retirement, here are some tips from CPAs and CFPs on your options.
Use a Roth IRA
A Roth IRA is a tax-advantaged individual retirement account. If you’re trying to get more from your paycheck for retirement, you might want to start contributing to one.
“Contribute to Roth IRAs with after-tax money. The income from those accounts is tax-free,” said Lei Han, Ph.D., CPA and professor of accounting at Niagara University.
Keep in mind that Roth IRAs come with certain income and contribution limits.
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You can only contribute so long as you earn no more than $146,000 or $161,000 (for singles and heads of households). Married couples filing jointly can contribute as long as they earn no more than $230,000 or $240,000.
The annual Roth IRA contribution limit is $7,000 this year. It goes up to $8,000 for those over age 50.
You can also contribute to a Traditional IRA. Your contributions are pre-taxed, meaning you won’t have to pay tax until you withdraw from the account at 59 1/2 (or beyond). Contributing pre-taxed dollars also means you have more money in your account that benefits from compound interest.
Take Advantage of Roth Conversions
At a certain point, you’ll have to start taking the required minimum distributions (RMDs) from your retirement accounts. Depending on your current and expected tax bracket, you might want to do a Roth conversion before you end up in a higher tax bracket due to these RMDs.
“In the years between retirement and RMD age (now 75 for many people), engage in Roth conversions,” said Randy Kurtz, CFP, chief investment officer at Upper Left Wealth Management, LLC. “Many retirees will experience ‘tax bracket creep’ where they will start out in a very low tax bracket when they retire, then creep up when they collect Social Security, and then break through to a new, higher bracket, when the RMDs occur. To mitigate or minimize this, engage in Roth conversions in those low tax years.”
Buy Treasury Bonds
Treasury bonds, or T-bonds, are another way to get more from your paycheck. These are government debt securities you can get through the U.S. federal government. Unlike treasury bills, often considered a short-term investment, T-bonds usually have a maturity of 20 or 30 years. This makes them ideal for long-term investors — or those looking toward their retirement years.
“Invest in T-bonds,” said Han. “The interest is taxable at the federal level but exempt from state/local income taxes.”
Hold Onto That Mortgage
If you have a mortgage, you might think the best option is to pay it off more quickly. And while this can be beneficial in many situations, you may want to hold off if you’re looking for those tax breaks.
“Don’t rush to pay off your mortgage,” said Kurtz. “Having a mortgage can lower taxes in retirement for some people.”
Weigh the pros and cons of keeping your mortgage vs. paying it off sooner, as well as the potential tax savings it might get you — in comparison to interest payments and other charges.
Use Employer-Based Retirement Accounts
If you have an employer-sponsored retirement plan, use it.
“To maximize retirement savings from [your] paycheck, consider leveraging employer-sponsored retirement plans, such as 401(k)s or 403(b)s, especially if there’s an employer match component,” said Dana Ronald, CEO of Tax Crisis Institute. “Contributing enough to get the full employer match is essentially free money that can significantly boost retirement savings.”
Get an HSA
An HSA, or a health savings account, is a tax-advantaged account for qualified medical expenses. It’s also a good way to save more money.
“Contributions are tax-deductible, the account’s growth is tax-free, and withdrawals for qualifying medical expenses are also untaxed,” Ronald said. “If used strategically, an HSA can serve as an additional retirement savings vehicle with the bonus of acting as a buffer for healthcare costs.”
By maximizing your contributions to your HSA, you’re essentially getting triple tax benefits — a tax deduction on your contributions, tax-free withdrawals, and tax-free growth. The money also compounds over time, so it’s best to not use it until you really need it.
Donate to Charities
Donating to charitable organizations could be another way to squeeze just a little more from your paycheck. But make sure you’re getting itemized deductions.
“Look to see if your annual charitable contributions are actually being itemized. Many people who give annually to charities are taking the standard deduction, thus get no tax benefit from the giving,” said Kurtz. “Instead, lump together a number of years of contributions and give to a Donor Advised Fund, get a deduction in that year, and then give annually to the charities of your choosing.”
Look Into Tax Credits
There are quite a few tax credits out there, so it’s a good idea to see what you qualify for and how much.
Take, for example, the earned income tax credit (EITC). Available for low- and moderate-income households, you could get a tax credit for up to $7,430 when filing taxes — depending on how many children you have.
Another option is the Retirement Savings Contributions Credit (or Saver’s Credit). You may be eligible for this credit if you’ve been contributing to an employer-sponsored retirement plan or an IRA. Depending on your adjusted gross income, you could get a credit for 10%, 20%, or 50% of your qualifying contributions.
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This article originally appeared on GOBankingRates.com: How To Squeeze More From Your Paycheck for Retirement
