www.qns.com I LIC COURIER I DECEMBER 2017 43
TAX TIPS
Year-End
Retirement
Tax Planning BY JOHN SAVIGNANO, CPA
If your company sponsors a 401 (k) plan, your employer may oer a match.
Make certain that you’re contributing at least enough in 2017 to get the full
match, which is essentially free money. e same is true when you’re setting up
your 2018 contributions late this year.
Many companies now oer both a traditional 401(k) and a Roth 401(k).
With the traditional version, contributions reduce taxable income and the
current tax bill, but future distributions will be taxable. Roth 401(k)
contributions oer no current tax benet, but distributions will all be tax-free
aer age 59 ½, if you have had the account for at least ve years.
If both versions are available, which should you choose for 2018
contributions? Employees in relatively low tax brackets may prefer the Roth
401(k) because the current tax savings will be modest and the advantage of
tax-free withdrawals in retirement may be signicant.
Employees in higher brackets may opt for the traditional 401(k) for upfront
tax reduction. at’s especially true for those who expect to be in a lower tax
bracket aer retirement. On the other hand, even plan participants with high
income might choose the Roth side if they wish to have a source of tax-free cash
ow in retirement and they already have ample pretax funds in the traditional
401(k). Note that all matches to a Roth 401(k) contribution will go into the
participants traditional 401(k) account.
Considering Contributions
In 2017 the maximum you can contribute to a 401(k) as a plan participant is
$18,000 or $24,000 if you will be at least 50 at year-end. As of this writing, the
2018 limits haven’t been released, but some estimates indicate they could be
$18,500 and $25,000. When you’re nalizing your 2017 contributions and
setting the amounts of income you’ll place in the plan in 2018, should you
choose the maximum amounts? at could be a savvy selection but you should
consider the alternatives.
Instead of maxing your 401(k), you may prefer to pay down any credit card
balances. Credit card interest is not tax deductible, so paying o a card with a
15% interest rate is the equivalent of earning 15%, aer tax, with no investment
risk. It’s possible you’ll earn that much or more with an unmatched 401(k)
contribution, which oers tax deferral, but that’s not a sure thing.
e choice between unmatched 401(k) contributions and paying down a
home mortgage or student loans is a tougher call. Mortgage interest usually is
tax deductible, and student loan interest might be, as well.
IRA Withdrawals
IRA owners also have some year-end tax planning opportunities. Money in
a traditional IRA compounds, tax deferred, but required minimum
distributions (RMDs) take eect aer age 70 ½.
IRA owners may want to take distributions before age 70 ½ . Careful
planning can ne tune the amount withdrawn at year-end 2017, keeping
taxable income within a relatively low tax bracket. Withdrawn funds may be
spent, given to loved ones, reinvested elsewhere, or moved to a Roth IRA for
potential tax-free treatment in the future.
Year-End Tax Planning for Charitable Contributions
Some surveys indicate that more than 30% of all charitable giving occurs in
December, and that over 10% of donations are made in the last three days of the
year. e year-end holiday spirit may be a factor in the early winter
philanthropy, but taxes probably play a role, as well. A check you write to your
favorite charity in December gives you a tax deduction the following April, but
if you wait until New Year’s you’ll have to wait a full year for the tax benet.
To do well while doing good, you might reconsider the typical practice of
writing checks for gis to charity. Instead give appreciated securities. Going
into the ninth year of a bull market, you probably have stocks or stock funds
that have gained value and would be ideal for contributing to your favorite
cause.
John Savignano is a partner with Savignano Accountants & Advisors located
at 47-46 Vernon Blvd., Second Floor, in Long Island City. If you have any
questions or require additional information, please call John at 718-707-0955.
