Tax season may not be for a few more months, but it is never too early to start saving for it. Tax time is always one of the most stressful times of the year for everyone, especially those who must end up paying taxes at the end of the year. Here are 4 tax-saving strategies that can help take away some of the burden:
If you are not covered by a qualified retirement plan at work, then you have two options when it comes to retirement savings: a Traditional IRA or a Roth IRA. Both are great options, but each one has different benefits. Both options have a $6,000 (or $7,000 if you are 50 or older) contribution limit for 2020.
Traditional IRAs are great for those who wish to have their retirement savings grow tax-deferred. Contributions to a traditional IRA come out of your pre-taxed income and therefore can be deducted on your taxes, thus saving you a bit on your tax bill.
Roth IRAs are geared more toward those who do not qualify for a retirement plan through their work, self-employed, and younger retirement savers. Contributions to a Roth IRA are not tax-deductible on your current tax bill, but your account will grow tax-free. Unlike with the traditional IRA, Roth IRA holders have the option of withdrawing contributions (NOT earnings) at any time without tax or penalty.
A 529 College Plan may not see as big a tax break as that of a deductible IRA or 401(K), but you will see the benefits when comes time to pay for college. Assets in a 529 College plan can grow tax-free when used for qualified educational expenses. Qualified educational expenses are not just strictly tuition, funds from a 529 College Plan can be used to cover books for college students, computers and internet access for college students, college room and board (as long as the student is enrolled at least half time), special needs equipment for college students, and student loans. Withdrawals from a 529 College Plan can be made at any time for any reason, but if it is not an educational related withdrawal then income tax and a 10% penalty will incur on the earnings portion of the withdrawal.
Pre-tax contributions to an employer-sponsored retirement plan are a great way to increase your retirement savings, while also decreasing your taxable income. 401(k) and 403(b) are your most common employer-sponsored retirement plans out there. These types of retirement plans have a $19,500 contribution limit for 2020. If you are participating in a retirement plan at work, you can use tax time to review your contributions and plan out your contributions for the remainder of the year. It is always a great idea to take full advantage of an employer-sponsored retirement plan by contributing enough to trigger your employer’s contribution match if one is offered.
A Personal Spending Plan is just a fancy way of saying you need a budget. Having a budget is not only a great way to find extra money, but it can also be a big help when planning for tax time. The only way a Personal Spending Plan will benefit you come tax time is if you stick with it and not just give up after a few weeks. If you are one of those people who rarely get a tax refund, then this is a crucial strategy that you should take full advantage of. A Personal Spending Plan will allow you to see if there is any extra money that you can put towards tax-advantaged accounts like the ones listed above. It can also help you find a way to save a little money to pay on your tax bill if you have exhausted all other options.
The 4 tax saving strategies listed above are only suggestions and should in no way be construed as financial advice. The author of this piece is not a financial advisor and this article is simply their take on ways to help come tax time. If you want to implement any of these strategies yourself, please contact a licensed financial advisor.