Tax planning in June? Before you grimace-after all, you just cleared the April 15th hurdle for last year’s return-take note: there are a few simple strategies you can put in place now that will help you trim your 2000 tax tab. They don’t require complicated calculations or in-depth research, just a quick review of your money management practices. The reward? Not writing Uncle Sam a check come next April 15.
Still skeptical? Let’s start with one that will benefit your tax planning as well as your overall financial health. Maximize your contributions to company savings plans and to any plans you have established for self-employment income. Although this may seem like a no-brainer, “It’s surprising how many individuals fail to maximize their contributions to their employer’s retirement plan,” says Marilyn Broussard, a certified financial planner and senior financial advisor with Waddell & Reed, St. Paul, Minnesota.
Fred Williams, who is now retired in Minneapolis, provides a good example. Williams, 65, a client of Broussard’s since 1983, explains that “[I] just didn’t know how much I could contribute to my employer’s plan. [Broussard] showed me the advantage of maximizing my contributions by slowing down on my other spending.” Williams, a former director of a community service organization in St. Paul, was eligible for his employer’s 403(b) plan, the nonprofit equivalent of a 401(k). Broussard counseled Williams to contribute the maximum allowed-20% of his annual salary-to this tax-deferred retirement plan, which he split roughly 50-50 among fixed and variable annuities and three mutual funds: United Vanguard, United New Concepts and United Income.
“I showed him the impact of compound interest with pretax dollars,” she says. An example from www.401kafe.com provides a good illustration. If you take $100 out of your wallet and put it into a savings account earning 10%, you’ll end up with $1,744.94 after 30 years. But if you’re in the 28% tax bracket, you actually had to earn $139 to have that $100 in your wallet. Therefore, if that original $139 was deducted from your paycheck before taxes were taken out, assuming the same circumstances, you’d have $2,425.47 after 30 years-and only feel $100 poorer.
As a result of solid planning, Williams says his retirement income is about the same as when he was employed. “That allows me to take a vacation periodically,” he says. “And I recently was able to buy a new car. I didn’t think my retirement would be this comfortable.”
Because a little planning can have a huge payoff, read on for more personal tax tips, as well as ways to save if you’re self-employed or a business owner.
PERSONAL INCOME TAX TIPS
Open an IRA for your nonworking spouse. “You’re allowed up to $2,000 a year in an IRA,” says Louis Barajas, a certified financial planner and enrolled agent who heads the accounting and investment firm Louis Barajas & Associates, Los Angeles. However, in a traditional IRA, it’s not fully tax deductible if you participate in an employer’s retirement plan, so opening one for a nonworking spouse “allows the partner