There are only a few weeks left to make 401(k) and some other retirement plan contributions that will get you a tax deduction on your 2014 tax return. Retirees also need to be aware of deadline dates for distributions from your various retirement accounts.
You can make a contribution of up to $17,500 to your 401(k) plan in 2014. Workers age 50 and over can contribute an extra $5,500 to their account as a catch-up contribution for a total of $23,000. Income tax isn’t due on the amount deposited in a traditional 401(k) plan until the money is withdrawn. For self-employed workers, a couple good options are a solo 401(k) plan or a simplified employee pension (SEP). With a SEP, you can contribute up to 20% of your net self-employment income for a total limit of $52,000 or $57,500 if you are over 50 years of age. The SEP contribution can be calculated before filing your taxes to minimize your tax bill. SEP contributions are not due until the due date of your tax return. That means for a 2014 deduction if you file an extension, your contribution would not be due until October 15, 2015.
Another option is an Individual Retirement Account (IRA). These contributions are not required to be made until April 15th to count toward your 2014 taxes and usually can be figured after your tax liability is determined. The IRA contribution limits are $5,500 or an additional $1,000 for people 50 and over for a total contribution of $6,500. Roth IRA’s have the same limits but are not pre-tax and will not decrease your tax bill, however, are also not taxable when distributed.
Retirees who have reached the age of 70 ½ have required minimum distributions from traditional 401(k)’s and IRAs and income tax will be due on each withdrawal. The date for making the distribution is April 1st after you have reached 70 ½ years of age. The penalty for missing a distribution is 50% tax on the amount that should have been distributed. It is best to consult a financial advisor to make sure the amount required is computed correctly and done by the due date.
It’s probably also a good idea to start planning for the 2015 tax year. The amounts for 401(k) contributions will increase by $500 to $18,000 and $6,000 for the catch-up contributions. Increasing your percent contributed each year can make a big difference in the long run, especially if there is an employer match. There are many options when it comes to retirement plans, make sure you are doing what is best for you and in the necessary time frame to achieve the most benefit.
Diane Cook, Accountant