Even though it is just the beginning of 2011 it is not too early to start planning for this year’s taxes. Many people do not realize all the tax advantages that they can receive from investing some of their income each year into different retirement accounts. Contributions to retirement accounts cannot only help come tax time, but they also give you the advantage of easier retirement planning down the road. Depending on what type of accounts you choose to invest in, you will either see a tax advantage this year or later on in your future.
One great way to reduce what you will owe at the end of the year is to contribute to an employee 401(k) or a traditional IRA, throughout the year. These types of accounts allow you to defer taxes on the dollar amount you contribute until you withdraw the money. Therefore, when you contribute to these types of accounts you very often can lower your tax bracket, as your total contribution will lower your gross income. Bottom line, your tax bill will be reduced if you owe the government money or your refund could be greater if you are due a refund.
Other types of retirement accounts that you can contribute to will be with after-tax money, meaning you won’t see a tax break this year. The nice thing about these accounts, however, is that your money will grow tax-free. Therefore, when you are ready to make withdrawals on these types of accounts you will not owe any taxes on any earnings you have made. Roth IRA’s and Roth 401k accounts have these great tax benefits.
As you are getting ready to plan on what retirement accounts you will invest in this year, you should be aware that many accounts do have limits on how much you can contribute during the 2011 tax year. Here is a breakdown of the different types of accounts and what your limits will be.
Traditional or Roth IRA
Even those these two accounts are taxed differently, they both have the same limits. Each individual can contribute a total of $5,000 to an IRA account in 2011 or if you are age 50 or older your contribution can total up to $6,000. If you have both a traditional and a Roth IRA account you should know that your contribution between the two accounts cannot exceed $5,000 or $6,000, depending on your age.
Note if you are married and filing jointly, you cannot contribute to a ROTH IRA if your modified adjusted gross income is $179k or more and your contribution limit starts to decrease once a MAGI if $169k is reached. If you are single, the former numbers are $107k and $122k respectively. There are other limitations so check with the IRS.
401k Plans
If you have a 401k plan through your work, in 2011 you will be able to contribute a total of $16,500 if you are under the age of 50. Those age 50 and older are able to contribute up to $22,000.
SEP IRA
Contributions during 2011 cannot exceed $49,000 for a SEP IRA.
Simple IRA
Contributions to a Simple IRA can total up to $11,500 in 2011 for those that are under age 50 and $14,000 for those who are age 50 or older.
403b Plan
If you have a 403b retirement plan your limits for 2011 are $16,500 if you are under age 50 and $22,000 if you are age 50 or older.
457 Plan
Contributions to a 457 plan during 2011 can total $16,500 if under age 50 and $22,000 for those ages 50 and older.
Defined Contribution Pension
Contribution limits in 2011 are $49,000.
Defined Benefit Pension
Contributions in 2011 are $195,000.
With any of these contribution limits, work with a CPA or your financial advisor to make sure you are in compliance with all IRS rules and regulations as there are many details and expectations not discussed above that may pertain to you.