Smart retirement moves to make before 2015

November, 25 2014 by Carolyn Richardson, EA, MBA

As the end of the year approaches, the holidays are probably more on your on your mind than saving on your taxes. But if you want to take advantage of last minute opportunities to save some money you probably need to review a few things. Take advantage of the time you have left between Thanksgiving and the year-end holidays. Before you know it you’ll be heading out to that New Year’s Eve party, and at that point it will be too late. While many tax provisions that expired at the end of 2013 have yet to be renewed, there are some smart moves you can make now regarding your retirement funds that will not only help you in retirement, but save you some money now.

If you haven’t maxed out your 401(k) contributions for 2014, now is the time to make some extra contributions. These normally need to be in the account by December 31 to reduce your tax liability for the year. For 2014, workers who are under the age of 50 can contribute a maximum of $17,500 to their 401(k) plans, and for those in the 25% tax bracket that’s a potential savings of $4,375. Workers who are 50 or older can contribute an additional $5,500 for 2014, for a total of $23,000 ($5,750 in savings for a 25% tax bracket). You should also consider resetting your contributions for 2015, as the maximum amount allowed for next year rises $500 to $18,000 for workers under 50. The “catch-up” contributions amount for workers 50 and older is also increasing by $500 to $6,000 for 2015, which allows those employees to contribute a maximum of $24,000.

If you qualify for a traditional IRA contribution, now might be the time to consider how much to contribute to that plan. Fortunately, you can wait until April 15, 2015, to make a final decision on how much to contribute to an IRA, and, in some cases, it may be better to wait to see what your tax situation is going to be before deciding on an IRA contribution. Even if you don’t qualify for a deductible traditional IRA, you may still qualify for a nondeductible IRA or a Roth IRA. While Roth contributions are not deductible on your return, the money is generally tax free when you withdraw it. Just make sure that if you make your contribution in 2015 you tell your financial institution that it’s for 2014.

Lower income taxpayers receive an additional benefit by making retirement contributions, as the Retirement Savers Credit is still available for 2014 and may offer a tax credit of up to $1,000 ($2,000 for couples) for households with lower income. To qualify for this credit, you must earn less than $30,000 for single taxpayers, $45,000 for heads of household, and $60,000 for married couples filing joint returns.

And, finally, if you turned 70½ during 2014, you’ll need to start taking distributions from your 401(k)s and IRAs to avoid paying a penalty on the required distributions you didn’t take. For the first year after you turn 70½, you can wait until April 15 of the following year to take the required minimum distribution (RMD), but for any other years the RMD must be made by December 31. The penalty is quite steep for failing to do so, equal to 50% of the tax on the amount that should have been withdrawn. If you delay your distribution until April 2015, keep in mind that you’ll have to do another one before December 2015, which may put you into a higher tax bracket. Your account holder should be able to tell you how much you must withdraw for the year.

Thinking of your taxes before the end of the year can result in significant benefits. So be smart, and have a Happy Holiday!