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Tax Tips: Don't Pay Uncle Sam What You Can Keep For Yourself...For Now, Anyway

By Hal Ratner
401k Forum Mutual Fund Analyst

We all know that the government needs our tax money in order to do its work. But you can put it to good use too. Here are some tips on reducing your 1999 taxable income while at the same time putting money away for retirement and other good causes.

  • If your employer offers a 401(k) plan, take advantage of it! You are allowed to contribute up to $10,000 in 1999. If you can't afford that much, you should definitely contribute enough to get your full employer match, if your company offers one. (Say your employer will contribute 50 cents for every dollar you contribute up to 6% of your gross salary. You'll get an extra 3% of your salary for free! If you earn $50,000 a year, that's $1,500 on your investment of $3,000.) If you don't get a company match, you'll still get the benefit of compounded interest -- you don't have to pay tax on your interest until you actually withdraw the funds.)

  • If you converted a traditional IRA to a new Roth IRA in 1998, you can choose to pay over four years any tax you owe due to the conversion, rather than paying it all at once this year. If you convert your traditional IRA to a Roth during this year, however, you'll have to pay the tax all at once on your 1999 tax return.

  • Make sure you explore other options for tax-deferred savings. Here are a few you may have overlooked.

    • If your non-working spouse doesn't have a spousal IRA, you might want to set one up. You can make annual deductible contributions of up to $2,000 into this kind of account, even if you participate in an employer-sponsored retirement plan like a 401(k) (which used to preclude deductible spousal contributions). But watch your modified adjusted gross income (AGI) - this type of deductible IRA contribution is phased out at AGIs between $150,000 and $160,000. (You can calculate your reduction by subtracting $150,000 from your modified AGI and dividing the result by $10,000.)

    • If you aren't eligible to make tax deductible contributions to an IRA, you might want to consider non-deductible IRAs for yourself and your spouse - at least your interest income will accumulate tax-free in the accounts.

    • If you have children, education IRAs are a way to save. You may contribute up to $500 annually (non-deductible) to an account for each child under 18. Withdrawals are tax-free if they are used for qualified educational purposes.

    • If you are self-employed, consider establishing a Keogh or SEP retirement plan.

  • Don't Lose 50%! You are required to take a minimum distribution on your tax-deferred accounts (401(k), IRA) by April 1 of the year following the calendar year in which you turn 70. If you don't, you could be charged 50% tax on the amount you were supposed to take out, but didn't. (The IRS lets us defer some taxes, but we have to pay them eventually. The benefit to us is that, as retirees, we are most likely in a lower tax bracket.) One exception: if you are 70 and you are still working for the employer that sponsors your 401(k) plan, and you do not hold more than 5% of company stock, you can put off minimum distribution payments until April 1 of the calendar year following the year in which you retire.

  • Give and you shall receive... a tax break. Reducing your adjusted gross income could enable you to qualify for certain tax credits or deductions. One example is the Child Tax Credit ($500 tax credit for each child, up from $400 in 1998, for single filers with an AGI below $75,000 and joint filers below $110,000). Charitable donations in cash or kind will enable you to help others while helping yourself.

For more details, check out the IRS web site at www.irs.gov.

Please keep in mind that the information provided here is meant to help you understand the general issue and does not constitute any tax or investment advice. You should consult an investment or tax advisor with respect to your own unique situation, and your 401(k) plan administrator with regard to the rules governing your particular plan.


The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.
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