In an era where tax breaks are being continuously eliminated and tax rates are rising, one of the best tools still available to taxpayers to save on their taxes is through the use of retirement plans. In an effort to encourage savings for retirement, the federal government allows taxpayers to take a deduction in the current year for contributions, allows them to grow tax free and then taxes them when they are withdrawn. However, the benefits for these contributions are limited to certain dollar amounts each year, indexed for inflation.
The amount of the contribution limitation is dependent on the particular type of retirement plan and the income of the taxpayer. Last week, the IRS announced the contribution limits for tax year 2015.
In addition to the different types of plans, there is also the designation of either a “Traditional” or “Roth” plan. “Traditional” is the type of plan that will allow you to take a deduction against your current year taxes, and the contributions will grow tax free until withdrawal, where they are taxable income. “Roth” plans do not allow for any tax deduction, the contributions will grow tax free, and then the withdrawals are tax free.
All taxpayers should consider taking advantage of these opportunities and increased limits, particularly self-employed and high income taxpayers. There is a significant planning opportunity here to save on taxes both now and in the future.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.