10 Ways to Save More for Retirement and Reduce Your Taxes
Save more for retirement and reduce your taxes! I often see people make contributions to retirement plans without paying attention to missed tax opportunities. It's possible to save more for retirement and reduce your taxes today and tomorrow. It's a delicate balance but could help boost your retirement and put more money back in your pocket today.
Here are ten ways that you can save more for retirement and reduce your taxes. Some of these points may work well for you, and others may not. If you walk away with one or two ideas, you're on the way to retirement success.
Balancing between the Roth IRA and Traditional IRA
Save more into a Traditional IRA; 2021/2022 contribution limits are $6,000, and if you’re 50 or older, an additional $1,000.
|IRA + Catchup Contribution||2021||2022|
|Roth IRA Age 50+||$7,000||$7,000|
|Traditional IRA Age 50+||$7,000||$7,000|
SEP IRA with employees
A SEP-IRA for small business owners and their employees can help you increase your contribution limits and add an employee benefit. The contributions to both you and your employees will help reduce your taxable income. The maximum amount that can be contributed to a SEP-IRA is 25% of your W-2 compensation or a modified formula if you are self-employed.
Here are the SEP-IRA contribution videos depending on your business type. Both videos are complete walk-throughs on the maximum contribution limits to your SEP-IRA.
Roth IRA and no RMDs
Save money into a Roth IRA. The growth inside of the Roth IRA grows tax-deferred and comes out tax-free in retirement. Unlike the traditional IRA, the Roth IRA is not subject to required minimum distribution rules (RMD). If you don't need the money, then you can keep it in this tax savings account for the rest of your life.
401(k) Contribution limits
Increase your 401(k) pre-tax contributions to maximum the employer match and reduce your taxable income. Save up to $20,500 for 2022 as an employee contribution. The match is in addition to your employee deferral amount.If your company matches 3% and you make $100,000, that’s an additional $3,000 towards your retirement. If you contributed the full $20,500 in the same example, your plan's total contribution would be $20,500 as an employee and an additional $3,000 from the employer match bringing the total to $23,500 for 2022.
|Workplace Retirement Plans||2021||2022|
|401(k), 403(b), Most 457 Plans, Thrift Savings Plans||$19,500||$20,500|
|Total Defined Contribution Plan Maximums||$58,000||$61,000|
NonDeductible Contribution and Backdoor Roth Conversion
Make a non-deductible contribution to your traditional IRA if you are subject to income limits on the Roth IRA. The Backdoor Roth IRA conversion may be an option. You will be subject to the pro-rata rule if you have existing pre-tax IRA contributions in any traditional IRA, SEP IRA, or SIMPLE IRA.
Municipal Bonds in taxable accounts
Municipal Bonds in a non-retirement account may reduce your taxable income depending on your income and tax bracket.
Dividend-paying stocks for favorable tax treatment
Dividend-paying stocks have favorable tax treatment on the dividends and may help reduce your taxable income compared to other sources of income.
Buy and Hold stocks for long-term capital gains
Consider value stocks for the long haul. Buying and holding your position longer than 12 months qualifies for long-term capital gains and reduced taxes. You must hold the position for more than 365 days to qualify for long-term capital gains. If you sell stock on the 365th day you will have short-term capital gains. Holding and selling on the 366th day is greater than one year and that will be taxed as long-term capital gains.
Workplace Plan NonDeductible Contribution for Megabackdoor Roth
Save more into your retirement plan at work beyond the company match and the employee maximum. If your plan allows, you may be eligible to make a non-deductible contribution to your workplace plan. This is a step in the Mega Backdoor Roth Conversion strategy.
Nonqualified Annuity for an income stream
Saving into a non-qualified annuity can defer your taxable gains.
Saving more and reducing your taxes is about making small positive changes. You don't have to tackle every point that applies to you at once. Pick one or two and put them to work.
Full Video Transcript
We all want more money in retirement, but we need more ways to save it. And while we're saving it, why don't we just try and reduce our taxes at the same time? Because that just makes good financial sense. Why work harder when you can work smarter? So in this video, I'm going to talk about ten ways that you can save more for your retirement and reduce your taxes.
What's going on, guys? Welcome back to the Channel or if this is your first time on our channel. Welcome to the Channel. My name is Travis Sickle, and let's go ahead and get right into this. Now, before we get into these ten, I want to change the way that you're looking at different parts of these ten, but also your entire financial life.
And that is not looking at just the one piece that you're saving or you're contributing to or you're making a change to. You have to look at the sum of all of these parts. So let's start with number one, and that is saving more into your IRAs. But it's not just about opening up a Roth IRA and throwing a bunch of money thinking that Roth IRA is the greatest retirement planning vehicle ever because all of the growth is not taxable.
But if you're working a little bit smarter, what you want to do is understand how the traditional IRA and the Roth IRA work together. So the traditional IRA that's pretax, that's going to help you reduce your taxable income today. The Roth IRA helps you on down the road in retirement, and that is where you get the Tax-Free Growth inside of the Roth IRA.
Now, that is great to get tax-free growth. But think about this for a minute. What if you put more money into the traditional side of your retirement plan, into your IRA to reduce your taxable income, you could possibly qualify for more credits and more deductions. So while you're contributing to both of these types of retirement plans, the IRAs, you want to take a little bit closer look to make sure that you're maximizing your tax savings both today and tomorrow.
Because remember, those credits and those deductions are basically use it or lose it. So if you can qualify for it, for example, like the child tax credit, you get right below the threshold. You qualify for more of the child tax credit, which puts more money back in your pocket. And that is a bigger bang for your buck. And those are tax dollars back into your pocket.
Number two is looking at the SEP-IRA. Now, I don't talk a whole lot about the SEP IRA anymore as much as I used to, because the sole for one K, but if you have employees, the Sep IRA might be the better bet because then you can contribute for yourself as well as your employees, where the Solo 401k you cannot have if you have any full-time employees.
But the SEP IRA is a retirement plan that you can get up to 25% if you're a W-2 employee and it works out to approximately 20%. If you are self-employed and you have a Schedule C filer and you're doing the net profit calculation now, I will put a link in the description at the bottom to the calculations. There are two different calculations for the SEP-IRA to make sure that you maximize the amount of savings that you're putting into your retirement plan.
And remember, the Sep IRA is all pretax, and even because it's 100% employee or funded it is still completely deductible and that is reducing your taxable income at the end of the day.
And number three is going back to the Roth IRA. Now, I want to go back to the Roth IRA as its own separate number to highlight the importance of the tax-free growth that you're getting inside of the Roth IRA, but also to talk about the RMDs, required minimum distributions.
If you're unfamiliar with RMDs, have you ever heard of them before? All of your pretax accounts will have to come out in retirement. It's called required minimum distributions. There is a certain formula that is based on your account balance on 1231 December 30, the first of each year and your age now at starting it currently at age 72, you have to start taking money out of your traditional IRAs.
But the Roth IRA is not subject to those RMDs. That means you're not increasing your taxable income throughout retirement. So what I'm highlighting here, going from point one to point three, is that balance between the traditional side and the Roth side, something that's very important and beneficial from a tax perspective, putting more money back in your pocket and more control with way.
Number four, we're going back to the other side and that is increasing your workplace or your 401K contribution. So a lot of people don't realize this, that they see that they're maxing out their retirement plan at work, but in fact, they're only going up to the match. You can actually go much further than the match and you can go up to four 2022.
It's going to go up to $20,500 that you can make as an employee contribution. And you can do the additional $6,500 into these plans. Whether you have a 401K, 403b, or most 457 plans, you can increase these contributions, and get more money into these retirement plans. So pay attention to getting more money, beyond the match so you can get to retirement.
And remember the pretax 401K is going to reduce your taxable income again, possibly to look at those credits and deductions that you might not otherwise qualify for.
And number five is if you don't meet the eligibility requirements to contribute directly to a Roth IRA or the traditional IRA as a deductible contribution, you could potentially make a nondeductible contribution because there are no income limits on a traditional nondeductible contribution.
Now, once you make that nondeductible contribution, you can look into converting it directly over to the Roth IRA immediately as a backdoor Roth conversion. Now, there is one point that you need to pay attention to if you're going to do the back to a Roth, and that is the pro-rata rule. So that's an equal amount of pretax and post-tax or the nondeductible contributions that will then need to be converted so that means you could potentially have an increase in your taxable situation.
So just be aware of the pro-rata rule and how it works. Otherwise, this is a way that you can get more money into your retirement plans and put it over to the Roth to get the tax-free growth and more money back in your pocket.
Number six is looking at muni bonds, which I don't talk a whole lot about on this channel.
But if you look at the muni bond interest payments, they are exempt at the federal level. That means more money back in your pocket and this works well if it's in a nonretirement account with muni bonds. Well, number seven is looking at dividend-paying stocks. Now, if you can get to qualified dividends, meaning you're holding your stock long enough that you can get qualified dividends, which are at capital gains rates, which are favorable tax rates relative to your ordinary income tax rates.
And you might not know this, but if your income is low enough, you might not have to pay anything on those gains anyways. So something to take a look at. Dividend-paying stocks
And way number eight is looking at the buy and hold strategy. Now, going back to the dividend-paying stocks, if you hold them for at least two months.
60 days and you can get qualified dividends. The same thing with stocks is if you hold them for longer periods of time longer than one year. Meaning 366 days. If you sell it on 365 you are going to be disappointed. But 366 days is long-term capital gains and favorable tax rates. They are less than your ordinary income tax rate.
So there is a benefit to the buy and hold strategy in addition to that, if you're buying and holding. Guess what? There are no taxes. So buying quality stocks for the long haul is a way that you can build your retirement nest egg and reduce your taxes.
Way number Nine is going back to that workplace plan. Now, not all plans are going to allow this provision, but if it does, you can put a lot of money into your retirement plan.
And what this is, this is going beyond the match, beyond the $20,500 maximum that you could do for 2022. This is making a nondeductible contribution and then converting it over to the Roth side if you can. And that is the mega backdoor Roth conversion strategy. You know, I've talked about that on this channel quite a bit.
I've done full videos on how to accomplish the mega back to a Roth. But this is a great tool if it's available in your plan you're going to need to look at your plan because there need to be plan provisions. Not every plan allows it. But if you have this ability, that means you could save a lot more that could go up to $61,000 potentially for 2022.
And way number ten is something that I really don't talk about. I don't think ever on this channel and it's a non-qualified annuity. Now, if you know about non-qualified annuities, they get a terrible rap. But here's the thing. When they're used appropriately in the right situations, they work, and they make sense. And very often when you're looking at a non-qualified annuity, it's usually for somebody who's a little bit late to the game, didn't save enough for their retirement, but they want to retire and they need a little bit more income in retirement.
A non-qualified annuity might be the way for you, and that could help you reduce your taxes, and control taxes because that's what an annuity does. It gives you tax-deferred growth inside of the annuity and throughout retirement. If there are riders or provisions with that particular annuity, it could potentially give you a guaranteed income stream. And that's not something that you can get in the stock market.
Now, you could get better returns in the stock market, and that's where it usually gets compared to. So if you've heard negative things about a nonqualified annuity, yeah, they are negative when they're used inappropriately, but so are stock. So you have to look at it in the right context. But wait Number ten, to help you reduce your taxes and increase your retirement income could potentially be a non-qualified annuity.
Now, I wanted to put all of these ten points out there, really just a bunch of different almost random points that you can do or you can use for your retirement plan. In reducing your taxes. But even if you just pull one or two points to improve your situation, that is really what this is meant for. It's not to say that you should be applying all ten points.
It's whatever works in your particular situation with any of these ten. If you have questions or comments, let me know in the comments down below. And if you've enjoyed this video, be sure to subscribe and we'll see you on the next one.