Boost Your Tax Savings and Your Retirement Savings How Contributing to a Retirement Plan Can Lower

When you contribute money to a retirement plan you might be entitled to a tax deduction on the money you put away. And when you draw that money out in retirement you might have a tax liability. Either way, it pays to do some preliminary tax planning to determine how your retirement plan will impact your finances and tax liability.

401k Contributions and Your W2 Form
If you contribute to a 401k plan at work, the amount of that 401k will be reflected on your W-2 form. When you contribute to a 401k, the amount you contribute is automatically deducted from the taxable income shown on your W2. W-2. That is why the Federal taxable wages on the W-2 are different from the state and local wages. When the employer issues the W-2, that employer checks the retirement plan check box in box 13 on the W-2.

Individual Retirement Account Deduction
If you contribute to a deductible IRA, you record the amount of your contribution on your tax form. If you use a tax software package to compute your taxes, you can simply answer a series of questions about your IRA contributions, and the software will automatically fill out the forms for you. If you file a paper return you need to enter the amount of the contribution manually. If you prefer you can also work with an accountant, who can help you determine the maximum IRA contribution you are entitled to. IRA contributions are subject to income limitations, so if you are in a high bracket you might not be able to make the full contribution to your IRA.

Retirement Plan Distributions
If you took distributions from a pension plan, IRA or 401k plan during the previous year, the administrator of the plan will send you a form you can use to fill out your tax return and figure your taxes. It is a good idea to go over the distribution amount with your accountant, especially if this is the first year you have received a retirement plan distribution. Your tax preparation needs change when you retire, and you need to report the income you received from pensions and IRA distributions on your 1040 form. Even if not all of your retirement plan distributions are taxable, you must still report the entire amount and use the tax form to compute the taxable portion of what you received.

Advance Tax Planning
If you are newly retired and will be taking a retirement distribution for the first time, it pays to do some advance tax planning to determine how much you might owe when you file your taxes. Even if you plan to have an accountant do your taxes it makes sense to know where you stand ahead of time. Gather as much information as you can about the retirement plan distributions you received, then use those figures to complete a preliminary tax return. You will not file this form with the Internal Revenue Service; you will simply use it estimate your tax liability and start saving the money you will need to pay those taxes when they are due.

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