Hammering Down Taxable Income
By: Craig Hammer
The New Year is here! I hope 2016 was a prosperous one for you. It seems like the year just started and now it’s over. The sights and sounds of the holiday season will soon be replaced by credit card statements and 2016 tax documents. Some of you may be surprised by the amount of capital gains realized in 2016 due to the sale of assets or through capital gains distributed by mutual funds. While you can’t undo what occurred in 2016, here are a few ideas you might want to consider to help reduce your taxable income for 2017.
- Contribute to your company-sponsored retirement plan. Many companies will allow you to invest pre-tax dollars into the company-sponsored retirement plan. If your company-sponsored plan is a 401(k), 403(b), or 457(b) plan, every dollar you contribute, up to $18,000 for 2017, reduces your taxable income by the contribution amount. If you are 50 years of age or older, you are allowed an additional $6,000 in contributions as a catch-up provision, providing a potential of $24,000 of pre-tax contributions into the retirement plan. As an added bonus, many companies will match a portion of your contributions which helps increase your retirement savings. Every plan is different, so please check with your plan administrator to find out what benefits your company plan allows. Keep in mind that taxes will be owed on any distribution of pre-tax contributions and earnings for this type of tax deferred account. If distributions occur before age 59 ½, then an early withdrawal penalty may be owed as well. If you leave the company sponsoring the plan between the ages of 55 and 59 ½, generally you can take distributions from the plan without the early withdrawal penalty.
- Contribute to an Individual Retirement Account (IRA). Depending on your income level, tax filing status and your ability to contribute to a company-sponsored plan, you may be able to contribute to an IRA. Many people enjoy the investment flexibility that an IRA allows since the IRA is not limited by the investment options offered by a company-sponsored plan. By contributing to an IRA, you are again lowering your taxable income by contributing pre-tax dollars, up to $5,500 for 2017 plus another $1,000 catch-up provision for anyone age 50 or older. If you are married, you may be able to reduce your taxable income even more by contributing to an IRA for your spouse also. Remember taxes will be owed on any distributions from the IRA in the year the distribution occurs and a 10% early withdrawal penalty may apply if you take the distribution before you attain the age of 59 ½. There are a few exceptions to the early withdrawal penalty.
- Purchase a tax-deferred annuity. If you have maximized your contributions to your company sponsored plan and/or your IRA but still wish to save additional funds for retirement, you may want to consider a tax-deferred annuity. This type of investment is purchased with after-tax dollars so you cannot deduct the purchase amount from your taxes. However, all the earnings and growth of the investments stay inside of the annuity and are not taxed until distributions are made. If you take a distribution from the annuity before you reach age 59 ½, then an early distribution penalty may apply. Insurance companies issue these types of investment vehicles in different forms to help meet the goals of individual investors. The features and strategies of these products vary greatly, so make sure you understand what the product does or does not do before you make the purchase.
- Contribute to a Health Savings Account (HSA). If you are enrolled in a high deductible health plan, you can make contributions to an HSA and receive a tax deduction for the contributions. For calendar year 2017, an individual will be able to deduct $3,400 of contributions while a family will be able to deduct $6,800 of contributions. A $1,000 catch-up provision applies to anyone age 55 or older. Contributions into the HSA can be invested in a variety of investment vehicles and the interest or earnings are not taxed. Distributions from the HSA may be tax free if they are used to pay for qualified medical expenses. The HSA is also portable, meaning that it stays with you if you were to change jobs or decide to retire. Some people choose to pay their deductibles and co-pays out of pocket during their working careers. They will contribute to their HSA annually and allow the assets to grow tax free. Then in retirement they will have an accumulated bucket of money to help offset a portion of their medical expenses.
- Contribute to a Roth IRA. If you are concerned about tax rates increasing during your retirement years, you may want to consider contributing to a Roth IRA. Contribution limits for the Roth IRA are the same as a Traditional IRA; however, income limitations are different. While you will not be able to deduct the contributions to the Roth IRA, the earnings grow tax deferred and can be distributed tax free if you are over 59 ½ years old and have owned the Roth IRA for five years. Having some assets in tax deferred accounts and some assets in tax free accounts can allow you to better control your taxes during retirement.
I hope one or more of these ideas will help you reduce your taxable income for 2017. Before implementing any of these concepts be sure to consult with your tax professional about your personal situation. Begin now and make 2017 a successful year!
Securities and investment advisory services offered through Geneos Wealth Management, Inc. Member FINRA/SIPC.