With just 74 days until Christmas morning (no kidding), your mind now might be more focused on spending than saving. But mid-October is actually a great time to boost retirement savings by tackling some key tax tasks. The extended filing deadline -- this year, Monday, October 16th -- is also the deadline for making some key retirement decisions. So, use this week wisely, and consider the following:
Establish or boost contributions to your self-employment retirement plan.
If you’re self-employed, either full- or part-time, and got a filing extension this year, you can open a self-employment retirement plan or add to an existing one. The benefit of doing so is that you can then deduct that retirement contribution as an above-the-line deduction, which lowers your adjusted gross income for the tax year and thus your overall tax burden. You’ll still see your cash reserves dip a bit, but at least you’ll be keeping your own money.
Depending on your income, your self-employment plan contribution also might make you eligible to claim the retirement saver's tax credit. This tax break, which maxes out at $1,000, rewards low- and moderate-income individuals for adding to their retirement accounts. It’s a credit, so it will directly reduce your tax bill dollar-for-dollar.
Self-employment retirement plans come in many forms. If you haven't opened one yet, give us a call. We can help you select the right option.
Take a do-over on your Roth conversion.
Do you regret converting your traditional IRA to a Roth IRA? It happens. The decision to convert isn’t easy, and people often wish they could take it back. Thankfully, you can.
If you want a do-over, IRS rules give you until the October extension deadline of the tax year following the conversion year to put the money back into a traditional IRA. Again, for 2016 tax year, the deadline is Monday, Oct. 16th. It’s time to get crackin’.
The most common reason to reverse a Roth conversion is that the retirement account has lost money since the change, which means you owe income tax on the converted amount. A recharacterization, the “do-over”, can erase the tax bill.
Moving money back into a traditional IRA isn’t a quick DIY project. It takes time because it must be done trustee-to-trustee. So don’t wait. If you think recharacterization is in order, start the process now. Monday’s deadline will be too late.
Say ‘yes’ to automatic escalation.
This one isn’t specific to Monday’s deadline, but just a good “October thing” to do. And this week is as good as any.
Many retirement plans offer the opportunity to automatically increase your savings rate from time to time. The usual adjustment is an annual 1 percentage point increase. That increase really adds up over time without hurting your wallet too much now.
Auto-escalation must be specifically requested, so contact your administrator now. It’s one of the easiest ways to make sure you’re saving more each year as your income (hopefully) increases.
Finding ways to boost retirement savings is always a good idea. This week, it can be particularly lucrative. Take advantage of these strategies if you haven’t already. As always, we’re here to help.