A Virginia tax lawyer can provide you with advice on taking advantage of tax breaks that will help you to reduce the amount that you owe the government each year. One of the best tax breaks that you can make use of to reduce your tax liability is the deduction for 401(k) contributions.
If you have access to a 401(k) at work or if you are eligible to open a solo 401(k) if you work independently, you can make contributions to this account with pre-tax funds and can save the money to use to support yourself during your senior years. Your 401(k) can be one of the best vehicles for saving for retirement, especially as the tax breaks make it more affordable to invest. And, the good news is, the amount you will be allowed to invest will be increasing in 2018.
The 401(k) Contribution Limit is Increasing in 2018
While you can put pre-tax money into your 401(k) account to help you with your retirement savings, there is an annual contribution limit. In 2017, the maximum limit was $18,000 in contributions unless you were over 50 and eligible for catch-up contributions. Catch-up contributions allow you to invest an additional $6,000 annually in pre-tax money.
In 2018, the limit will be going up by $500. This means that you can now invest a total of $18,500 in your 401(k) or $24,500 if you are over the age of 50. The additional amount of savings may not seem like much, but it can add up to a lot over time as the extra $500 you are allowed to invest grows thanks to compound interest.
The additional $500 also means you get a boost to your tax savings now. If you are in the 30% tax bracket, the additional $500 that you can contribute to your 401(k) means you’ll save $150 on your taxes.
A 401(k) is not the only type of tax advantaged retirement account that you are allowed to make contributions to. As long as your income is not too high, you may also be eligible to contribute up to $5,500 in either a traditional IRA or a Roth IRA.
A traditional IRA gives you tax breaks up front for investing, just like most 401(k) accounts do. A Roth IRA gives you tax breaks when you take money out of the account. You invest with after-tax dollars (money you paid taxes on) but you can withdraw your cash without being taxed on it as a senior as long as you follow specific guidelines like leaving the money in the account for at least five years before taking it out and not withdrawing before you reach retirement age.
If you want to find out more about different accounts that provide tax breaks for retirement or if you need assistance taking advantage of tax breaks to reduce your tax liability, you should reach out to a Virginia tax lawyer like Kevin Thorn as soon as possible for help.
