For most corporate accountants, the fourth quarter of the year represents an opportunity to accomplish or finish all of the financial objectives that are still left on the books for that time period. Those who are contributing to any type of retirement savings account should view the last three months of the calendar year in the same manner. The end of September is a good time for employees and business owners to assess the contributions and other activity in their IRAs and retirement plans over the past nine months. If you are behind in your retirement plan contributions for the year, this is the time to figure out how to catch up. Here are some tips you can use to make certain that you effectively maximize your retirement plan contributions before the year is out.
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"Catch Up" Contributions
If you are age 50 or above, then you are allowed additional contributions to either your qualified plan or IRA for the year. For 2010, qualified plan participants can add another $5,500 of additional catch-up contributions on top of the maximum $16,500 allowed for qualified plans, or another $1,000 to a traditional or Roth IRA on top of the maximum allowable contribution. Therefore if you have already reached your normal contribution limit for your plan or account for the year, then don't forget to sock away the additional catch-up amount if you qualify.
Taxpayers who may not have high enough income to take advantage of tax credits or deductions that they will be entitled to when they file should consider converting an appropriate portion of any traditional IRA or qualified plan balances into a Roth IRA before the end of the year. The tax from the additional income that is generated by the conversion can then be written off against the credits or deductions. Furthermore, the $100,000 aggregate income limit for Roth conversions has been lifted for 2010, making this an especially good time to transfer retirement plan balances into tax-free Roth accounts.
Deductible Contribution Limit Calculations
Employees who contribute to both an employer-sponsored qualified plan and a traditional IRA may face a dollar limit on the amount of money that they can deduct on their IRA contributions if their incomes exceed a certain threshold. For this reason, it may be advantageous for the employee to wait until the following year to contribute to the IRA if the amount of income to be reported next year is expected to be less than the current year.
Start A Self-Employed Retirement Plan and/or HSA
Taxpayers who own their own businesses and currently have no retirement plan of any kind can drop nearly $50,000 into a self-employed 401(k) or SEP plan before the end of the year. If the owner does not anticipate needing to take large lump-sum distributions from this account, then a traditional plan can provided a substantial year-end tax deduction for those seeking relief in this area. Health Savings Accounts (HSAs) can provide another avenue of tax-deductible contributions that can be used for retirement if they are not used for medical expenses. (For more on HSAs, take a look at Health-y Savings Accounts)
The Bottom Line
Retirement plan contributions are one of the more flexible avenues available for tax-planning, as they allow taxpayers to adjust their level of taxable income to some extent. IRAs can be especially useful in this capacity, as their contributions can be deferred until April 15 of the following year if necessary. However, taxpayers should do their homework before making any substantial changes to their retirement strategies; there are many rules and variables that must be considered in order to determine the correct course of action. For example, converting a large IRA balance to a Roth in a single year may result in unnecessary taxation of your plan assets. For more information on year-end retirement planning strategies, consult your tax, retirement or financial advisor or HR representative.
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