Retirement Planning – Which Plan is Right for You?

Goodbye, 2017… Hello, 2018!

But wait… the end of the year means … tax season is soon to follow!

Yes, taxpayers will soon be making some pretty hefty decisions. And if you’re retiring, even more so! How can you plan for retirement now? Here are some hints and tips to help you make smart fiscal decisions as the year draws to a close.

What kind of retirement plan should you choose? 

Today, many companies offer both a traditional 401(k) and a Roth 401(k). Here’s how to know which one’s for you:

  • If you are in a lower tax bracket, you might prefer the Roth 401(k). You’ll receive rather significant tax-free withdrawals in retirement.
  • On the other hand, if you are currently in a higher tax bracket and want an immediate tax reduction, you might want to opt for the traditional 401(k). However, even if you are in a higher tax bracket now, you might still want to have a source of tax-free cash flow during retirement. If that’s the case, then go for the Roth 410(k) plan.

In 2017, the maximum you can contribute to a 401(k) is $18,000, plus an additional $6,000 if you are over the age of 50. If you don’t want to maximize these amounts, might consider paying off your credit card bills. Remember, credit card interest is not tax deductible, so it’s beneficial to pay down those credit card balances now. With regards to a home mortgage or student loans, the decision may not be so cut and dry, as these types of interest can be tax deductible.

What if your company does not offer a retirement plan? 

Open and fund an IRA account. Keep in mind, the due date to do so is April 15th, regardless of when you file your taxes.

For IRA withdrawals, IRA owners must take distributions after the age of 70.5. Carefully plan out how much you’d like to withdraw before year-end to keep taxable income low. With the money you withdraw, you could give it to your loved ones, reinvest it elsewhere, move it to a Roth IRA (for a tax-free future), or simply spend it on yourself!

Just like a 401(k), you can choose between a traditional IRA and a Roth IRA. Depending on which tax bracket you find yourself in, the benefits to opening either a traditional IRA or a Roth IRA or similar that of traditional and Roth 401(k)’s. In short:

  • If you are in a lower tax bracket, consider opening a Roth IRA.
  • If you are in a higher tax bracket, consider opening a traditional IRA.

When should I make charitable contributions?

To answer this question, you might want to consider when you’d like to experience a tax deduction. If you write a check to your favorite charity in December, your tax deduction is soon to follow in April! However, should you decide to wait until New Year’s, you’ll have to wait a year before receiving the tax benefit.

Furthermore, if you have stocks or stock funds that have gained value over time, you could choose to give appreciated securities to your favorite cause instead of a check. You’ll still be making excellent use of your funds while helping those in need!

We understand that retirement planning can be complex and confusing. Your financial future is as important to us as it is to you, so feel free to contact us if you’d like further tax planning assistance!