I have some good news and some bad news for you.
We’ll start with the good news: We got much overdue tax relief last December with the Tax Cuts and Jobs Act of 2017. Most Americans – and particular those with high incomes – will see a significant reduction in their tax bill.
Now for the bad news: It’s not going to be of any use to you until this time next year, when you’re filing your 2018 taxes. For 2017, you’re still paying taxes at the old rates, buddy.
I hate paying taxes with an ideological zeal, and I do everything legally permissible that I can to lower my tax bill. Earlier in my career, I would skip meals in order to scrimp together enough cash to max out my 401(k) and IRA.
Thankfully, I don’t need to do that today, and I’m not suggesting you should. It’s probably not healthy to be as obsessive compulsive about tax avoidance as I was.
But all the same, it’s in your best interest to lower your tax bill – because every dollar you keep out of Uncle Sam’s grubby paws is a dollar that can grow for you over time.
How to Save Some Cash
So, with the April 17 tax-filing deadline now less than two weeks away, let’s try to find a few ways to save you some cash.
If you work a regular nine-to-five job, it’s too late to contribute to your company 401(k) plan. To quote Austin Powers, that train has sailed, baby, yeah.
But you can contribute up to $5,500 to an IRA or Roth IRA any time up until the April 17 deadline, and $6,500 if you’re 50 or older. (If you’ve already filed your taxes, no problem. You can amend your return. Just make sure you make the contribution by the April 17 deadline.)
I should make a few points here. If you already have access to a company 401(k) plan, you generally can’t make a tax-deductible contribution to a traditional IRA.
You can, however, make a contribution to a Roth IRA, assuming you’re under the income limits. You don’t get an immediate tax break with a Roth contribution, but you do potentially get a lifetime of tax-free compounding. Plus, you’re not subject to required minimum distributions in retirement and all of your withdrawals are tax-free.
In tax year 2017, your ability to contribute to a Roth starts to get phased out at an income of $118,000 ($186,000 for married couples filing jointly) and disappears completely at an income of $133,000 ($196,000 for married couples filing jointly).
If you make too much money to qualify for the Roth IRA, congrats! That’s what we call a “high-quality problem.” But you still might have options at your disposal. You can potentially make a non-deductible contribution to a traditional IRA and then immediately convert it to a Roth IRA.
Yes, it’s legal. It’s a loophole created by Congress in 2010 that effectively circumvents the income restrictions on the Roth IRA.
But if you’re going to go this route, I do recommend getting help from a financial planner or CPA because there are a few landmines you have to watch out for. (For example, you’d need to move any existing pre-tax IRA dollars to your 401(k) plan to avoid getting ensnared by the pro-rata rule.)
So kids, be careful when trying this at home.
If you own your own business or work as a contractor, your options are better. You can’t contribute to an Individual 401(k) plan unless you had already created the plan as of December 31. But you can open and fund a SEP IRA and dump as much as $54,000 into it for tax year 2017, depending on your income.
Of course, it plays to plan ahead. If you haven’t already, start socking back the cash for 2018 too. You can dump $18,500 into your company 401(k) plan this year, not including employer matching. IRA contribution limits haven’t changed this year, but the maximums for SEP IRAs and Individual IRAs was raised to $55,000.
The market is off to a rotten start this year, but don’t let that discourage you from sticking it to the taxman. Dollars stuffed into a retirement account don’t have to be immediately invested. You can simply pocket the tax break, leave the contributions in cash, and wait for the dust in this market correction to settle.