Thursday, 11 February 2021 15:02
By Stephen Kyne, CFP, Partner at Sterling Manor Financial, LLC | Families Today
It’s Tax Season!

2020 may be over but, for many of us, the books are not completely closed. Last year was an extremely difficult year for many, so it’s important to revisit some tax strategies that could help you keep more of your hard-earned money.

You may not realize but you may be able to make contributions to your Roth IRA for 2020 up until the earlier of your tax filing date, or April 15th.  If eligible, the contribution limit is $6,000 ($7,000 for those age 50+), but don’t be discouraged if you are not able to fully fund your account for the year. Every bit you can save will help provide for your lifestyle in retirement, so a partial contribution is better than no contribution at all. 

Just because one spouse may be a homemaker or already retired, doesn’t mean that they can’t take advantage of a Roth IRA.  IRS rules also allow for contributions to an account for a homemaker or retired spouse, as long as the working spouse has sufficient earned income, even if the spouse is older than 70 ½.

Since Roth IRAs can provide tax-free distributions and are not subject to Required Minimum Distributions at age 70 ½, they can be an extremely beneficial retirement funding option!

If you’re looking for a tax deduction today, consider contributing to a Traditional IRA instead. The limits are the same, and your contribution can be tax-free for 2020. 

Anyone whose earned income is reported to them on a form 1099, K1, or other similar non-employee form, may be eligible to establish and fund a retirement plan for 2020. The IRS rules allow this to be done up until the filing deadline (including extensions) for the previous year. Popular plan options include a SEP IRA and Individual 401k.

For those who are self-employed, and don’t have access to a retirement plan through an employer, you may think you’re being disadvantaged when it comes to saving for retirement. The opposite, however, may be true. As a self-employed person, you could have the options of contributing up to $57,000 to a retirement plan for 2020, and deducting the full contribution! 

A SEP IRA can allow you to contribute up to 25% of your income with a maximum contribution of $57,000, and can be appropriate for workers with high income and no employees. Because of the 25% limitation, your income would need to exceed $228,000 in order to fully contribute.

An Individual 401k has the same funding limit of $57,000 for 2020, however there is not a 25% limitation. In other words, a self-employed worker (with no employees) earning $57,000 may be eligible to contribute all of their income to an Individual 401k without being limited by the 25% cap. So, if you have a working spouse, or other means of making ends meet, an individual 401k may be a great option for supercharging your family’s retirement savings! Those over age 50 could contribute an additional $6,500.

Individual 401ks require more in the way of record keeping and compliance, so they can be more expensive and cumbersome than a SEP IRA. Remember, you don’t have to be able to fully fund a plan for it to still make sense. Don’t rule out an Individual 401k because you can “only” afford to contribute $30,000 to it.

The mail this year has been notoriously slow so, while you may be tempted to run out and file right away, be sure to double check that you’ve received all of your expected tax documents. Also be sure to check that none of the documents you’ve received are marked “DRAFT.” 

As a point of disclosure: Your circumstances are unique and tax regulations can be very complex. Before implementing any tax strategy, we recommend working closely with your independent financial advisor and tax preparer to determine eligibility and funding limits, and to ensure your retirement funding and tax strategies comply with all appropriate regulations. 

Stephen Kyne, CFP is a Partner at Sterling Manor Financial, LLC in Saratoga Springs, and Rhinebeck. 

Securities offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Advisory services offered through Sterling Manor Financial, LLC, or Cadaret Grant & Co., Inc., SEC registered investment advisors. Sterling Manor Financial and Cadaret Grant are separate entities.

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