Managing Your Finances, Planning For Retirement
Guide to Maxing Out Your 2020 Tax Contributions
Date:08 June, 2020
With all of the turmoil in the U.S. economy right now, there are some critical money moves you should make to minimize your tax liability and maximize your dollars in 2020. Here are a few places to contribute funds before the end of the year.
Max Out Retirement Accounts
Whether it’s a traditional retirement plan like a 401(k) or a Traditional or Roth IRA option, it’s advantageous to max out your yearly allowable contribution to a retirement account—or get as close as you can within your current budget. For 2020, participants can contribute up to $19,500 pre-tax dollars to a 401(k) for those under 50 and an additional $6,500 in “catch up contributions” for anyone 50 and older.
An IRA has the added bonus of accepting contributions up to the income tax due date in April, with a limit of $6,000 to an IRA or $7,000 if you’re 50 and over. Of course, the tax rules depend entirely on which type of IRA you own and whether your employer contributes to your retirement plan as well. Be sure to discuss the options with your tax advisors before making significant contributions.
Health Savings Accounts
Many adults with a high-deductible health plan (HDHP) choose to max out their contributions to a Health Savings Account (HSA) to mitigate the unpredictability of medical costs.
Especially for retirees with limited access to monthly cash, having tax-free funds available to pay those costs rather than requiring a taxable distribution from a 401(k) or IRA can make an incredible difference. Should you find yourself in great health later in life, with little need for healthcare-specific savings, HSA funds are also accessible for any purpose without penalty once the owner reaches the age of 65. Non-qualified withdrawals are taxable, but so are withdrawals from pre-tax retirement accounts, making the HSA a fantastic way to save for retirement.
HSA contribution limits in 2020 increased to $3,550 for self-only (an increase of $50 over last year) and $7,100 for family (up $100 since 2019).
Mortgage & Student Loan Interest
Many in this country are struggling to keep up with loan payments, and there may be assistance out there if this affects you. However, if you are able to make one more big payment on your major loan accounts it could have a considerable tax benefit. First, homeowners can deduct the interest they pay on as much as $750,000 of qualified personal residence debt on a first or second home. This was reduced in 2018 from the $1 million former limit on qualified personal residence debt.
Regarding student loans, the IRS allows taxpayers to take a deduction of up to $2,500 in qualifying student loan interest per year. One important thing to note, your lender will only send a tax form (Form 1098-E) if you paid $600 or more in student loan interest throughout the year. If you paid less, you are still eligible for the deduction, but you'll need to request the necessary tax information.
- Consult your tax adviser regarding any tax benefits or penalties, contribution/deductibility limits, or qualifying criteria for retirement accounts, Health Savings Accounts, or mortgage and student loan interest.
- Under the CARES Act, the deadline for filing 2019 Federal income tax returns, as well as for 2019 IRA and HSA contributions, has been extended to July 15, 2020.
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