Tips for tax savings
How did you fare with Uncle Sam last year? If you received a big refund — or ended up owing more — you may want to adjust the withholdings on your W2.
If you have your employer withhold too much from your taxes, you're essentially overpaying on your taxes — and giving the government an interest-free loan. If you don't withhold enough, however, you may get an unpleasant surprise at tax time. You may even owe penalties for underpayment. To change your W2 withholdings, see your employer.
One way to reduce your current tax burden is by contributing the maximum to your employer's retirement plan. For 2015, the Internal Revenue Service (IRS) maximum is $18,000 plus an additional $6,000 in catch-up contributions for individuals age 50 and older, subject to plan limits. The entire amount can be deferred pre-tax, reducing your taxable income by $24,000.
In some cases, Individual Retirement Account (IRA) contributions of up to $6,500 are tax deductible. That includes the $5,500 IRS limit plus an additional $1,000 catch-up contribution for those age 50 and older. For the 2015 tax year, the amount is fully deductible if you earn less than $61,000, if single; or $98,000, if married filing jointly, or if neither you nor your spouse can participate in an employer-sponsored retirement plan.
If you'd rather pay taxes now instead of later, you can contribute to a Roth IRA or make Roth 401(k) contributions, subject to retirement plan provisions. You don't gain tax savings now, but funds in a Roth account aren't taxed upon qualified withdrawal, assuming certain conditions are met. For 2015, the maximum contribution to all IRAs (including a Roth IRA) is $6,500 for those age 50 and older.
Another way to pay less to Uncle Sam is by rolling over funds from a previous employer's retirement plan instead of cashing out. When you cash out funds from a previous employer's plan, you'll likely pay significant taxes and IRS penalties. Rolling those funds over into an IRA, however, lets you defer taxes, avoid IRS penalties and give your investment the potential to keep growing.
*Online contribution changes are not allowed for all retirement plans. If you are not able to update your contribution at principal.com, see your human resources contact.
Action plan generated from online tool is a general self-help tool and is not intended to be a financial plan or investment advice from any company of the Principal Financial Group.
While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
Insurance products and plan administrative services are provided by Principal Life Insurance Company. Securities are offered through Princor Financial Services Corporation, 1-800-547-7754, Member SIPC and/or independent broker dealers. Securities sold by a Princor® Registered Representative are offered through Princor. Princor and Principal Life are members of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.