For most people, tax time is for worrying about getting audited and hoping for a refund that will help make ends meet.
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But it doesn't have to be that way.
Take this time to plan how to have more savings for your golden years. There are more ways to save for retirement than just taking advantage of your company’s 401(k), which today, is almost the equivalent of stuffing your savings in a mason jar and burying it under your porch.
People need to get creative and really take advantage of all the different ways the law allows you to save money now, earn more money tomorrow and have more to retire on later.
Here's how to boost your retirement funds this time of year:
• The average tax refund for 2009 was $3,035, if this was saved each year for 30 years it could provide a significant part of your retirement income. Better yet, reduce your tax withholding at work by $253 per month and save the same amount monthly. Monthly compounding instead of annual compounding grows even faster.
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• Do not defer your income in a 401(k) plan if you are in a 15% tax bracket unless your employer matches the amount you save. Place the money in a Roth IRA instead. Tax brackets will probably never be lower than they are now and there’s a good chance they will be higher. Distributions from a Roth IRA will be tax free in retirement.
• Money saved outside of a retirement account should be invested in stock mutual funds. Most of the earnings on stock funds are either in the form of qualified dividends or long-term capital gains.
Both types of income are taxed at 0% in a 15% tax bracket and a maximum of 15% in higher tax brackets.
• Tax-free funds currently offer returns comparable to taxable funds. The average yield on intermediate tax-free fund was 3.6% in December versus an intermediate taxable fund at 3.9%.
• Say no to higher health insurance premiums and start a Health Savings Account with a high- deductible policy. The maximum deductible contribution is $6,150 for 2011 for families and $3,050 for single coverage. Distributions are tax free if used for medical expenses, and balances can be carried over from year to year. Premiums on a high-deductible health insurance policy are typically half the cost of a traditional policy.
• Taxpayers that are age 70 ½ with IRAs can give money directly to a charity from their IRA in 2011. Making charitable gifts this way keeps the taxable income off your tax return and this could lower the amount of your Social Security benefits that are subject to tax.
• If you took money out of a retirement account before age 59 ½, you will owe tax on the distribution, but you may be able to avoid the penalty. There are six exceptions to the penalty. Find out if you qualify for any of them.
The law provides many ways to save money, so while those filing the quick and dirty tax forms may get a quick refund, you may be shortchanging yourself in the future.
Rick Rodgers, CFP® is an author, keynote speaker, wealth manager and president of Rodgers & Associates, “The Retirement Specialists,” in Lancaster, PA. Rick’s articles on retirement planning have appeared in Wealth Manager Magazine, CPA Magazine and Physician’s Money Digest. He also writes a column for Lancaster County Magazine titled “It’s Your Money."