If you want to pay as little tax as possible, you can't afford to wait until late in the game to start thinking about tax-saving strategies. There are numerous tax breaks that you can use to your advantage, but most of them take some advance planning and forethought in order to get the most out of them.
One of the most popular things that taxpayers try to do to reduce their tax bills at the last minute is to contribute to a retirement account. However, there's a better time to make retirement contributions to an IRA or 401(k) than at the last possible moment.
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Getting in under the wire
One reason why IRAs are as popular as they are is that they cater to the procrastinator in all of us. If you want to get a tax deduction on your 2018 tax return, then contributing to a traditional IRA is one of the only options left to cut your tax bill heading into the mid-April filing deadline.
The rules governing IRAs are unusual in that they allow you until the tax-filing deadline for the tax year in question to make contributions and claim deductions for a given tax year. So even if you haven't contributed a penny toward your retirement in 2018, you can still put up to $5,500 into an IRA -- or $6,500 if you're 50 or older -- anytime until April 15. Those numbers rise to $6,000 and $7,000, respectively, for 2019.
However, there's no rule that says that you have to wait until the last minute to make IRA contributions. The window for contributing to your IRA for the 2019 tax year is already open, having been available as of Jan. 1.
Contributing early has a couple of advantages. First, the sooner you get money working for you in an IRA, the more tax advantages you get, including tax-deferred income and growth within your retirement account. Also, unless you just happen to have $5,500 lying around, most people find it far easier to make gradual contributions on a regular basis throughout the year than having to scurry right before they file their tax returns to get an IRA funded.
Double up with a 401(k)
Getting yourself out of the last-minute mind-set is also important when you're dealing with the other major type of retirement savings account, because 401(k) plans don't give you the same flexibility that IRAs do. If you want to get a tax break for making 401(k) contributions, then you can't wait months after the end of the year -- you've got to get that money into your retirement plan account by Dec. 31.
Moreover, there are several benefits to using a 401(k) that even an IRA won't give you. First, the contribution limits are much higher -- $19,000 in 2019 for those younger than 50, or $25,000 for those 50 or older. Also, some employers give their employees matching contributions on money that they put toward their retirement. For instance, it's not unusual for a company to match 50% or even 100% of everything a worker contributes to a 401(k) up to a set percentage of the worker's salary -- commonly anywhere from 3% to 6%. If you get in the habit of having regular amounts withheld from your paycheck and put into your 401(k) account, then you'll cash in on any employer match you're eligible to receive as well as get a head start on making retirement savings a year-long financial commitment.
Catch up today
Obviously, if you're just now starting to think about saving for retirement using IRAs and 401(k)s, you probably won't be able to turn on a dime and get on track to make regular contributions throughout the year all at once. But setting that as your final goal will help you get started. As time goes on, you'll eventually get to the point at which you're paying yourself first -- and never having to wait until the last minute with tax-saving strategies.
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