'Tis the season to try and lower your taxes. As the end of 2012 rolls around, it isn't too late to max out your contributions to either your 401(k), 403(b) or IRA accounts.
Most people know they have until tax day the following year to max out their IRA, but you also can take some of the tax burden off by maxing out your defined contribution retirement plan by Dec. 31.
This is a great way to lower your taxable income and avoid owing money to Uncle Sam come April.
In 2012, individuals can set aside $17,000 in their employer-sponsored defined contribution retirement plan. Those over age 50 can make an additional $5,500 catch-up contribution.
"If people are really looking to put money away, then once they have maxed out their 401(k) contributions at their employer, they can max out their contributions in their IRA," said Bryan Mogg, CPA, managing member of Bryan Mogg & Associates, LLC in Englewood, Colo.
Depending on a person's income levels, they may not be able to deduct their contributions to their IRA on their taxes, but that money still grows tax deferred, so there is a benefit to doing it, he said.
Don't forget to take into account the last paycheck of the year when trying to maximize your 401(k) contributions for the year. If you set aside too much additional money, you may miss out on the free money contributed by your employer. It also may be too late to max out your workplace retirement account. Each employer sets its own rules about when employees can make changes to their deferrals, so speak to your benefits person to see if it is still allowed at this late date.
Mogg loves the Roth IRA and recommends it to anyone who meets the income threshold for this vehicle.
"The Roth IRA is pretty amazing. There is no deduction on the front side. It grows tax deferred and you pull it out tax free," he said. Individuals with a Roth also can pull money out early for retirement or a first time home buy without being subject to the 10 percent penalty for early withdrawal. The same goes for educational expenses. If a person pulls money out of their Roth IRA to pay for their child's college tuition, it comes out tax free and they don't have to pay the 10 percent penalty for early withdrawal.
That money also doesn't get added onto a person's net income so it doesn't push a person into a higher tax bracket, Mogg said. There are caveats to taking money out of a Roth IRA, so familiarize yourself with the age and other requirements before using your Roth in this manner.
He likes the Roth over a 529 educational savings plan because "you can totally control how you invest the money," he said. Also, with a 529 plan, a person will receive a state tax deduction but not a federal one. There also are limited investment choices, like in a 401(k) plan. With a Roth IRA, you have the same investment options as you would in a traditional IRA. You don't get a tax deduction on your state taxes but you do get to control how your money is invested, he said.
Individuals who want to save even more outside of their 401(k) or IRA plans can utilize a health spending account as an investment vehicle. Health spending accounts are part health savings account and part retirement account. Anyone who signs up for a high deductible health insurance plan sets money aside pre-tax in their HSA account. If they have medical bills, the money to meet their annual deductible comes out of the health spending account. If you don't have any medical bills, that money will be invested and kept as a retirement savings plan and is a nice way to save more each year, Mogg said.
Many high wealth individuals use the health spending account as a retirement and tax savings vehicle. If a person incurs medical expenses, they pay them out of pocket instead of using their health spending account and then they max out the amount they contribute to that account on an annual basis. In 2012, that amount was $3,100 for single coverage and $6,250 for family coverage.
Small business owners can still set up a SEP IRA for 2012 up until the due date of their business return, which is March 15, or up until their extension date, which is Sept. 15, Mogg said. If a business makes enough money, it can set aside up to $50,000 in a SEP.
Where people can really put money away is in the defined benefit arena, Mogg said. Lawyers or doctors, for instance, who have a handful of employees, can set up a defined benefit plan by Dec. 31 and contribute money for that plan into 2013. They can put away $150,000 or more a year into this plan, and it has the added benefit of covering certain employees as well.
