On the 10th day of The 12 Tax Tips of Christmas, my true love gave to me early retirement. Well, to be honest, the hubby and I are still fighting over who gets to quit working first. But here's some tax advice that could help us, and you, give up the 9-to-5 sooner rather than later.
If your company offers a 401(k) plan, contribute to it, as least up to the company match percentage. And even if your employer has suspended the match, it's still a good way to build a nest egg. Your contributions are automatic and made before you get your hands on the cash, so you don't really miss it and you're not tempted to spend it elsewhere.
Plus, because the money comes out before payroll taxes are calculated, you keep a bit out of Uncle Sam's hands (at least for now), and that's always a nice feeling.
Even if you have a 401(k) or similar retirement plan at work, you can also contribute to an IRA.
Many opt for the Roth IRA. Although you don't get an immediate tax break, when you start taking money out years down the road, the withdrawals are tax-free.
A traditional IRA still appeals to others, primarily because in many cases, contributions to this account are tax deductible.
And self-employed folks also have lots of retirement plan options, such as a SEP-IRA, Keogh or Solo 401(k). Just make sure you don't miss any deadlines. Keoghs and Solo(k)s, for example, need to be established by the end of the tax year in which you plan to make contributions. So you've just got a couple of weeks left to set up one of these for 2009.
If you have traditional IRA and are considering converting it to a Roth, 2010 might just be the year. When Jan. 1 arrives there's no income restriction on converting. But make sure it's the best thing for you. A key consideration of the conversion is how to pay taxes due on your traditional IRA earnings.
One of the attractive options with a 2010 conversion is that you can defer any conversion taxes into the 2011 and 2012 tax years. When folks hear they get a year of no taxes, their ears perk up. But don't do this without taking a good look at your situation.Among the things to think about, as I note in 3 ways to pay for a Roth IRA conversion (I didn't write this story; I'm a source) are the coming higher income tax rates. Remember than in 2011, Dubya's rate cuts are set to expire. Most of us expect that to happen on schedule, at least with regard to the top tax brackets.
So be sure to factor in the expected higher rates and what that might do to your taxes, especially if you're accounting for a nice chunk of traditional-to-Roth conversion taxes.
Although the tax mantra usually is "pay no tax before its time," if you prefer you can hand over all your conversion taxes in 2010 when the top rate is 4.6 percent less than it will be the following year(s). Just a thought. Run the numbers to get an idea of when it might be best for you to pay, either next year or spread over 2011 and 2012.Related posts:
- The 12 Tax Tips of Christmas: #1 Sell Assets
- The 12 Tax Tips of Christmas: #2 Improve Your Home
- The 12 Tax Tips of Christmas: #3 Spend Your FSA
- The 12 Tax Tips of Christmas: #4 Be Charitable
- The 12 Tax Tips of Christmas: #5 Do a Mock Return
- The 12 Tax Tips of Christmas: #6 Watch Out for AMT Issues
- The 12 Tax Tips of Christmas: #7 Defer Income
- The 12 Tax Tips of Christmas: #8 Make House Payments Early
- The 12 Tax Tips of Christmas: #9 Bunch Your Expenses
- 2009 Year-end Money Moves: Retirement
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