Tax-Code Wealth Building Ideas & Retirement Plan Contributions Amounts
On the tables below you will find all of the 2013 Retirement Plan maximum contribution amounts in detail. Please be aware that all standard 401(k) or 403(b) contributions must be made by December 31st. Traditional, Roth, & SIMPLE IRA contributions are due by April 15, 2014 for calendar year 2013 and any SEP IRA contributions must be made by the due date including any extensions for filing your tax return.
For those who want to utilize the tax code to the best of their ability to build wealth here are a few items to study up on:
Tax-Deferred Employer Retirement Plans: You should think very long and hard about maximizing your contributions to your tax deferred retirement plans so that the money comes out of your paycheck automatically before you ever see it. This is a relatively easy way to save because you seldom miss what you never had. Additionally, if your employer offers a matching program, make sure to save enough to maximize this free money: it is the easiest savings you will ever put away. Additionally, these savings cost far less than you might think because Uncle Sam gives you a tax break to boot.
Spousal IRA: If you are married a file a joint tax return, you can contribute to an IRA for your spouse with zero income (aka Spousal IRA) as long as the other spouse has sufficient earned income. You can contribute to either a Traditional or Roth IRA. If your Modified Adjusted Gross Income (MAGI) is in excess of $188,000 there will be no tax-deduction for contributing to an IRA. In order to contribute to a Spousal Roth, married couples must have an MAGI of less than $188,000 for tax year 2013.
Backdoor Roth IRA: This is a technique for contributing to a Roth IRA when your income exceeds the contribution limit. There is no income limit on contributing to a nondeductible Traditional IRA, nor on converting a Traditional IRA to a Roth IRA. To make a backdoor contribution, first make a regular contribution to a Traditional IRA with your IRA custodian. You do not specify to the custodian whether the IRA is deductible or not; it is just treated as an IRA. As soon as the contribution posts, convert to a Roth IRA. If you have any other (non-Roth) IRAs, the taxable portion of any conversion you make is prorated over all your IRAs; you cannot convert just the non-deductible amount. In order to benefit from the backdoor, you must either convert your other IRAs as well (which may not be a good idea, as you are usually in a high tax bracket if you need to use the backdoor), or else transfer your deductible IRA contributions to an employer plan such as a 401(k) (which may cost you if the 401(k) has poor investment options).
Health Savings Account (HSA): With benefits season and Obamacare in full effect , many employers and insurance companies are including High Deductible Health Plans with Health Savings Accounts as an option. This can be a great option for many people. The downside to these plans is that you have to have a high deductible health insurance plan. The upside, however, may certainly outweigh the downsides as we will discuss below but you but you need to evaluate it for yourself.
HSA’s are an improvement over the Flexible Savings Accounts (FSA) in several ways. First, you pay for your health care with pre-tax dollars, but with an HSA, you don’t lose any unspent money left over at the end of the year (with an FSA you can now rollover $500 to the next plan year if your plan is eligible). Second, if you leave that money in the account (it can be invested and continue to benefit from compound interest) until retirement age. Third, you don’t even have to spend the savings on health care in retirement.
Fourth, you don’t pay tax on it up front like a Traditional IRA (e.g. the amount you put in, reduces your tax bill). Fifth, like both a Traditional and a Roth IRA, you don’t pay tax on it as it grows. Sixth, In retirement, when you withdraw the money, unlike regular Traditional IRAs, you don’t have to pay any tax on it if you use it to pay for health care costs in retirement (a time when you’ll likely be less healthy and have more need for those health care dollars than now).
So this account is 3X TAX-ADVANTAGED if you use the money for health care. But even if you don’t need it for health care, you can treat it just like a Traditional IRA once you hit age 65. But it is even better than a traditional IRA for two reasons: First, there is no income limit on deducting your contributions. The contributions are deductible even if you make a million dollars a year. Second, the contribution limit can be higher than the $5,500 limit on Traditional or Roth IRAs -$6,550 for a Family ; $3,300 for an individual for 2014.
Start a Small Business Retirement Plan: Starting a small business retirement savings plan is easier than you think and offers significant tax advantages. Employer contributions are deductible from the employer’s i income, employee contributions are not taxed until distributed to the employee, and investments in the program grow tax-deferred. Further, the tax law offers a small incentive of a $500-per-year tax credit for the first three years of a new SEP, SIMPLE or other retirement plan to cover the initial setup expenses for certain small employers.
So there you have it, a bunch of timely, tax-code wealth building ideas for you to explore. Please consult a qualified tax-adviser for advice on your specific situation.
