Think that your 2020 tax situation is written in stone? Think again.
Most tax-saving measures must occur by year-end. However, there are several ways to stay on top of your taxes and boost savings before the April 15 deadline. Let’s take a look at a few ways to maximize your 2020 accounts.
Fund your retirement accounts
The deadline to contribute to some of your 2020 retirement accounts is April 15, 2021. Take a second look at the following accounts to ensure you have saved as much as possible.
The IRS gives taxpayers an extension when it comes to certain retirement accounts. A traditional IRA is one of them. You can make contributions, whether deductible or not, until April 15, 2021. The maximum contribution for 2020 and 2021 is $6,000 or $7,000 for those age 50 or older.
How do you know if contributions are deductible? The IRS limits deductions under the following circumstances:
- You and/or your spouse are covered by a retirement plan at work.
- Your modified adjusted gross income surpasses the thresholds.
Check out this chart to see where you fall. Remember money grows tax-deferred and taxed as ordinary income upon distribution.
Roth dollars are an important addition to your retirement savings strategy. Roth IRA contributions are taxable but qualified distributions are tax-free. As with traditional IRAs, you can contribute up to $6,000 or $7,000 if age 50 or older.
Make too much income to contribute to a Roth IRA? Consider converting non-deductible traditional IRA contributions to a Roth. Give our team a call to see if a Roth conversion makes sense for your unique tax situation.
Self-employed individuals receive an additional contribution extension. You can fund your SEP-IRA until the due date of your tax return including extensions (as late as October 15th). The contribution limit for this account is the lesser of $57,000 or 25% of employee compensation in 2020.
What about workplace retirement plans? Most employer-sponsored plans have a December 31 deadline. For 2020, those 50 or older can contribute an extra $6,500 to their 401(k) on top of the $19,500 limit.
Some plans permit the $6,500 catch-up contributions after-year end, so give us a call to see if your plan qualifies. Making the most of your contributions now will help fund your retirement lifestyle.
Remember your HSA
Health Savings Accounts are the unicorn of tax-advantaged accounts. Contributions are tax-deductible, grow tax-deferred, and distributions remain tax-free if used for qualified medical expenses. This a lucrative addition to your savings plan. HSA funds can cover medical expenses so every penny counts ($295,000 for the average retired couple).
You can save up to $3,500 for single coverage and $7,100 for family coverage in 2020. Those 55 or older can chip in an extra $1,000. Tax-deductible contributions lower your taxable income and increase your savings— a win-win situation.
Gather and organize your documents
Tax time comes with a lot of paperwork, so why not get a jump on the documents you’ll need to make filing season a breeze. Here are a few documents you won’t want to forget:
- Last year’s tax return
- Current W-2
- Mortgage interest documents
- Student loan interest documents
- Receipts for deductions and write-offs (look into home office deductions to see if you qualify)
- Realized gains and losses in brokerage accounts
- Documents for charitable contributions
Being organized at tax time will save you and your tax professional a lot of time and energy. As with most financial to-dos, the more prepared you are, the better.
Contact your financial professionals
We want to help you take advantage of every financial opportunity available to you. Maxing out your contributions is one of them. There is still time to make maximize your savings for retirement in 2020 over the first few months of 2021. You and your future self deserve it.
Set up a call with our team today if you have questions about your contributions or how they will impact your 2020 tax bill.
We look forward to helping you approach tax time with clarity and confidence.
Paradigm Advisors is a fee-only financial planning firm based in Dallas, Texas and Fayetteville, Arkansas. Paradigm Advisors provides comprehensive financial planning and investment management services to help clients organize, grow and protect their wealth throughout life’s journey. Paradigm specializes in advising well-established career executives through financial planning and investment management. As a fee-only fiduciary and independent financial advisor, Paradigm never receives commission of any kind. Paradigm is legally bound by certification to provide unbiased and trustworthy financial advice.