Tax

Need a tax break? Here are accounts that can ease tax burdens during big life transitions

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Saving for retirement or other big life moments is often viewed as an end in itself: Sock away a little bit each month, and you’ll achieve your financial goals. But many of these accounts can also play a role in lowering your tax burden here and now.

Take Erin Lowry, a self-employed personal finance expert who blogs at BrokeMillennial.com and whose book “Broke Millennial Takes on Investing” will be published in early April. Her transition from company employee with a 401(k) to self-employed worker included the challenge of setting up a new retirement plan.

“The advice out there is for the traditional employee, like, ‘Make sure you get the employer match,’” she recalls. “As a self-employed person, retirement is entirely on my shoulders.”

That includes navigating a complicated set of issues when it comes to retirement savings, such as deciding which type of account best fits her needs.

Lowry said she eventually picked a SEP-IRA, which has higher contribution limits than traditional or Roth IRAs. It also has the advantage of helping with tax planning because contributions are tax-deductible.

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The SEP-IRA allows Lowry to contribute for the previous tax year until the tax-filing deadline of April 15, which gives her time to strategize with her accountant on last-minute contributions to lower her taxable income. “I’ll put in a little more right before I finalize my tax return for 2018,” she notes.

Tapping those types of tax strategies are crucial for financial planning, says Chantel Bonneau, a wealth management adviser at Northwestern Mutual. And more workers may be thinking about getting a better handle on their tax burdens after the massive tax overhaul that went into effect last year, she adds.

That being said, she advises people to focus on their financial targets first and foremost.

“We all want tax benefits, but make sure you are doing things that will get you closer to your goal,” she says. In other words, “Don’t buy a house for the tax benefit – buy it because you want to own a house.”

Source:-usatoday

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