How Can Retirement Contributions Lower Your Tax Bill?

Written by Paul Belfiore on February 25, 2022. Posted in Blog, Taxes.

Amherst, NH Residents Looks for Advice

Contributing a portion of your income into a tax-deferred retirement savings account, like an IRA, can reduce your total income. This may be able to put you into a lower tax bracket, saving money while still putting aside money for retirement. A 401(k) works much the same way, allowing contributors to defer paying income taxes on contributions. This can make a big difference for those that are in a high tax bracket, since when the income is withdrawn you will likely be at a much lower tax bracket.

A resident in Amherst was looking for ways to save on her tax bill, while investing wisely for the future. Looking for recommendations, she contacted the experts at Merrimack Tax Associates.

Maxing Out Contributions in Retirement Accounts Can Offer Tax Savings

Tax-deferred retirement accounts are a great option to save for your golden years. These are also typically tax advantageous accounts. The money that you invest in an IRA or 401(k) account will have taxes deferred until the investment is withdrawn from the account. In most cases you will pay a much lower tax rate in retirement. Investing this money now will save on taxes in the long run, reducing the total tax that you owe.

There is a limit of how much tax-deferred money can be invested into these accounts. In 2021 the allowed amount with deferred income tax in an IRA was $6,000. That number for a 401(k) was maxed out at $19,500. At the age of 50 the allowed amount of tax-deferred income that can be invested increases to $7,000 for an IRA and $26,000 towards a 401(k).

Another option to save for retirement is a Roth IRA. This differs from a traditional IRA in that the money invested is initially taxed but the investment growth is not taxed. While this may not help to save on taxes now, it is still a good option for future tax savings.

The Amherst resident was pleased to hear her options and has plans to invest a portion of her income in a 401(k), which will significantly reduce the amount that she will pay in taxes.