When you’re saving for retirement, you save not only for your future, but you also save today. Thanks to numerous retirement saving tax breaks, there are many ways to lower your tax bill during your working years by simply doing what you ought to be doing anyway: saving for retirement.
Saving for Retirement, Method 1: Individual Retirement Account (IRA) Contributions
Your regular IRA contributions may be tax deductible depending on your modified adjusted gross income (MAGI) and whether you are covered by a workplace retirement plan, such as a 401K plan. Review the 2009 limits and realize that you may be staring at up to $5,000 (or $6,000 if you’re 50 or older) in potential tax deductions by putting some money away in your IRA.
Saving for Retirement, Method 2: 401K Contributions
Contributions you make to a 401K plan also save you money on your taxes since every dollar you contribute reduces the wages reported to you on Form W2. In 2009, you can contribute up to $16,500 to your 401K plan or $22,000 if you are 50 or older. Not surprisingly, a 401K plan is one of the best ways to save on your taxes.
Saving for Retirement Might Lower Your Taxes Even More
Since the retirement saving tax deductions lower your income, they could also make you eligible for other tax saving opportunities, many of which are unrelated to retirement planning. For example, eligibility to take certain education deductions and education credits is based on your income. Likewise, to benefit from the first time home buyer tax credit, your income must be below certain levels. When you’re on the bubble for qualifying for a tax break, saving for retirement could help you today – and a lot more than you expected.