Tax Planning for Retirement Plans Aster Billing

Saving via a retirement plan is a popular way to efficiently reduce taxes. Contributing money to a traditional IRA can minimize gross income up to $6,500. As of 2018, if meeting all qualifications, a filer under age 50 receives a reduction of $5,500 and a reduction of $6,500 if age 50 or older. For example, if a 52-year-old male with an annual income of $50,000 who made a $6,500 contribution to a traditional IRA has an adjusted gross income of $43,500, the $6,500 contribution would grow tax-deferred until retirement.

There are several other retirement plans that an individual may use to help reduce tax liability. 401(k) plans are popular with larger companies that have many employees. Participants in the plan can defer income from their paycheck directly into the company’s 401(k) plan. The greatest difference is that the contribution limit dollar amount is much higher than that of an IRA.

Using the same example as above, the 52-year-old could contribute up to $24,500. As of 2018, if under age 50, the salary contribution can be up to $18,500, or up to $24,500 if age 50 or older. This 401(k) deposit reduces adjusted gross income from $50,000 to $25,500.

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