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 2012, the Internal Revenue Service (IRS) maximum is $17,000 plus an additional $5,500 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 $22,500.
In some cases, Individual Retirement Account (IRA) contributions of up to $6,000 are tax deductible. That includes the $5,000 IRS limit plus an additional $1,000 catch-up contribution for those age 50 and older. For the 2012 tax year, the amount is fully deductible if you earn less than $58,000, if single; or $92,000, 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 2012, the maximum contribution to all IRAs (including a Roth IRA) is $6,000 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.
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