Shared from the 2017-03-19 The Atlanta Journal-Constitution eEdition


How retirement options figure into upcoming Tax Day deadline

IRAs, HDHP, HSA and Roth IRAs — it’s never too late to start saving.


Chase Mouchet

It’s never too early to begin saving for retirement, and with the April 18 deadline for filing federal and state taxes looming, many people still have time and options to accomplish this goal while cutting their tax bill for 2016.

Some individuals may still contribute to an Individual Retirement Account (IRA) or set up a Health Savings Account (HSA). For people who find themselves with extra cash to put toward retirement, here are a few options to consider as the 2016 tax deadline approaches:

Many people can still contribute to a traditional IRA. Employees and other individuals can supplement the savings in their employer’s retirement plan with a contribution to an IRA. Unlike 401(k) or 403(b) retirement plans, IRA contributions can be made until the tax deadline. For someone whose income is under certain limits, starting at $61,000 for single filers, and for employees who don’t have a retirement plan through their job, the contribution could be fully deducted on their tax return.

For 2016, the maximum IRA contribution is $5,500 per person. Also, people 50 and older can contribute an additional $1,000, so a married couple over 50 can defer as much as $13,000.

Spouses who aren’t employed can also fund an IRA before April 18, and in many cases can deduct the contribution from household income. For example, a married person with a 401(k) can also set up and contribute $5,500 to an IRA for a non-working spouse. This IRA contribution could be fully deducted if the household’s modified adjusted gross income is $184,000 or less.

Those who have already contributed the maximum amount to a company retirement plan — $18,000 for those under 50 and $24,000 for people over 50 — and who earn above the IRA deduction limits still have options. For example, a married, working couple making $118,000 or more could still fund up to $11,000 in total nondeductible contributions. Although this money is not tax-deductible, these after-tax contributions may help offset some of the taxes owed once a person has retired.

Business owners still have time to fund a Simplified Employee Pension (SEP) IRA. Similar to a 401(k) plan, contributions to a SEP are tax-deductible and grow tax-deferred. The good news is that the contribution limits are higher than a traditional or Roth IRA; a business owner can defer 25% of net earnings or a maximum of $53,000, whichever amount is less. If needed, business owners have extra time to make a SEP contribution until the filing extension due date.

Healthy moves

High Deductible Health Plan (HDHP) participants are still eligible to fund a Health Savings Account (HSA) before April 18. These health plans offer a triple tax benefit: contributions are tax-deductible, the funds grow tax-free and none of the funds used for qualified medical expenses are taxed when the money is withdrawn.

A family enrolled in a HDHP can contribute up to $6,750 to an HSA for 2016, and the IRS allows people age 55 or older to contribute an additional $1,000. HSAs can be a great long-term health care funding resource for people who pay current medical costs out-of-pocket and invest their HSA contributions for growth. Even if used in retirement after age 65 for non-qualified medical or other expenses, the money will simply be taxed.

For long-term tax planning beyond 2016, consider a Roth IRA, which is another retirement option for people with annual earnings below specific amounts. For example, a single person with income less than $117,000 can contribute up to the $5,500 maximum.

Any money withdrawn from a Roth IRA after age 591/2 is completely tax free, as long as the person has held a Roth IRA for at least five years. This creates tax-free cash flow in retirement.

People who aren’t eligible to fund a Roth contribution may benefit by converting their traditional IRA to a Roth IRA. While this means paying taxes now on these contributions, the funds in the new Roth IRA won’t be taxed in retirement.

Existing IRAs from previous contributions or rollovers from old 401(k) balances can also be converted to a Roth IRA. But this move isn’t for everyone; a big hurdle for most people is coming up with the cash outside of the IRA to pay any taxes due on the conversion.

The April tax deadline is coming soon. By understanding the options and the main differences between these retirement accounts, people can take action now and position themselves for a better financial future.

Chase Mouchet is a senior financial planner for Brightworth, an Atlanta wealth management firm.

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