Taxes could soon take a bigger chunk out of your money – meaning now may be a good time to make the most of tax-advantaged investments in your retirement planning process.
The Bush administration tax cuts are scheduled to expire at the end of 2010 – and when they do, the maximum rate on ordinary income will rise from 35% to 39.6%, on long-term capital gains from 15% to 20%, and on dividends from 15% to 39.6%.
Additionally, in 2013, high-income households will have to pay more Medicare tax on wages and may also face a 3.8% Medicare levy on net investment income, thanks to healthcare reform.
While it’s possible that Congress will postpone the expiration of the Bush administration tax cuts, it’s still a good idea to plan for it and other rate hikes.
So, assuming you’re already maxing out your 401(k) plan contributions, what other steps can you take to make the most of tax-advantaged investments in your retirement planning process?
You may be able to contribute as much as $5,000 a year (plus an extra $1,000 if you’re 50 or older) to a traditional Individual Retirement Account (IRA) or Roth IRA.
If you don’t qualify for such an IRA, you can still put money in a Roth IRA indirectly by opening a non-deductible IRA (which anyone under age 70½ with earned income can do) and then convert it into a Roth IRA. If you have self-employment income, you may be able to put money in a SEP IRA or solo 401(k), which allows contributions of up to $49,000 this year (with an extra $5,000 for the solo 401(k) if you’re 50 or older).
The legal and tax information contained in this article is merely a summary of our understanding and interpretation of some current provisions of tax law and is not exhaustive. Consult your legal or tax counsel for advice and information concerning your particular circumstances. Neither we nor our representatives, may give legal or tax advice.