3 Retirement Tax Benefits

Saving for your retirement is always a prudent or wise choice; furthermore, there are a number of money-saving retirement tax benefits that may help motivate you to save more for your golden years. Generally speaking, the government even encourages retirement savings by deferring, and in some case eliminating, taxes on money that you save for your retirement. Here is a list of ways that saving for your future can benefit you now:

Number One – Income Tax Deferrals

Taxes on contributions to 401(k) accounts, IRA accounts (Individual Retirement Account), ROTH accounts and other similar retirement savings plans are not paid until the funds are actually withdrawn from the 401(k) or traditional IRA account by the taxpayer. Also, as long as your money is in the 401(k) or IRA account, it will earn some type of interest or dividend. The amount of interest or dividends that are added to your account may be more than the taxes that you are later required to pay on the withdrawals.

Number Two – Income Tax Deductions

When you contribute to a 401(k) or traditional IRA account (or other similar savings plan) the IRS considers these contributions to be “Pre-Tax” deductions in your salary or wages; this means that the contributions of reduce your taxable income. Therefore, you'll be required to pay less income tax on the portion of the income that you do receive. The deductions will normally be much larger than any other type of deduction that you may claim on your income tax return.

Number Three – Income Tax Credits

In 2008, a change was made to the Federal tax laws, which provides a tax-credit for low and middle income workers that contribute money into an individual retirement account (IRA) or 401(K) plan with their employer. The new tax credit, called the “Retirement Savings Contribution Credit” offer a tax credit of 10 – 50 percent of the amount of money that you contribute to a retirement savings account depending on your household income.

The percentage rate of the allowable tax credit varies according to your income, and if you are single or married. Single taxpayers that earn less than $16,000 can claim 50 percent of their retirement account contributions in the form of a tax credit. Single filers that earn more than $16,000 and less than $17,250 can claim a 20 percent tax credit. Finally, single taxpayers that earn more than $17,250 and less than $26,500 will earn a 10 percent tax credit.

Likewise, married people that file joint returns can also claim the tax credit. The limits for the credit are:

•Up to $32,000 – 50 percent;
•More than $32,000 and less than $34,500 – 20 percent;
•More than $34,500 and less than $53,000 – 10 percent

Depending on your personal financial situation, there may be other benefits available to you. For more detailed information, you should consult with a professional tax accountant or visit the IRS website and learn more about the various tax rules and requirements that govern retirement benefits and savings.

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