How To Shelter Income from Taxes

Maximize contributions to your workplace retirement plan. One easy way to set money aside on a tax-advantaged basis is to participate in your employer-sponsored retirement plan - usually a 401(k) or SIMPLE, or for government and nonprofit employees a 403(b) or tax-sheltered annuity plan. The IRS recently announced new and higher limits for 401(k) contributions for 2015. You can make elective deferrals of up to $18,000 per year, and another $6,000 on top of that if you are age 50 or older. For 403(b)s, the elective deferral limit has also been raised to $18,000, with another $6,000 in catch-up contributions if you are age 50 or older. The maximum contribution you can make to a SIMPLE plan via salary deferral is $12,500, with an additional $3,000 in catch-up contributions authorized for those aged 50 and older. Your employer may provide a matching contribution. Speak with your HR staff at work or your supervisor for details about whether your employer matches contributions. Self Employed? Own a Business? Start Your Own Retirement Plan! You don't need to work for a large company to have a 401(k) plan. If you are self-employed or the owner/employee of a corporation, you may be able to start your own small-company 401(k) plan (often called a 'solo 401(k)' or individual 401(k) plan) to cover yourself and a spouse. You can shelter up to $18,000 in your own compensation from income taxes (up to $24,000 if you are age 50 or older). On top of that, you can have your company make contributions on your behalf - substantially increasing the amount of money you can set shelter from income taxes  - up to $53,000 per year. You may also consider a Simplified Employee Pension Plan (SEP) which has similarly high contribution limits. Simply establish an SEP account and you can contribute as much as 25 percent of your compensation up to $53,000 per year. There are no catch-up contribution provisions for SEPs. You may qualify for a tax credit to offset startup costs in the first few years of establishing a plan. Contact your retirement planning or tax professional for details of the Small Business Retirement Plan tax credit. Contribute to an IRA Contributions you make to a traditional IRA are deductible up to $5,500, provided you fall under certain income limits. If your income exceeds these limits, you can still contribute up to $5,500, while taking a partial deduction, or simply contributing on a non-deductible basis. In either case, all assets in your traditional IRA will grow tax-deferred. You will only pay income taxes on amounts you withdraw. A 10 percent surcharge may apply to withdrawals made prior to age 59½, except for certain specified hardship conditions, or to pay for a college education for yourself or a loved one or to make a down payment on a home of up to $10,000. Required minimum distribution rules may apply after you turn 70½. You don't have to itemize your expenses in order to take a deduction for IRA contributions. If you are relatively young, or you believe your income tax rates in retirement will be higher than they are now, you may consider a Roth IRA. There is no tax deduction on contributions, but all assets that have been in the account for at least five years grow tax -free. That is, no income tax is due on withdrawals/distributions from Roth IRAs. A 10 percent excise tax may apply to withdrawals prior to age 59½, but only on the growth in the account - not on contributions returned to you, since you already paid income tax on those dollars. For more information, feel free to Contact Neptune Financial to schedule an appointment. Basic Understanding This blog is being provided for informational or educational purposes only. It does not take into an investment objectives or financial situation of any individual, family, prospect, client, or prospective clients. The information is not written or intended as investment advice and is not a recommendation about managing or investing your retirement savings. An individual seeking information regarding their investment or retirement needs should contact a financial professional. Neptune Financial, and their financial professionals do not render tax and legal advice. Please consult your tax and legal advisors regarding your personal tax or legal concerns.