Tax Tips |
Tax Tip
Overview
- Social Security is a foundation for retirement, but you also need investments.
- Many employers match a certain percentage your 401(k) contributions.
- IRAs may provide some tax advantages for retirement savings.
- Mutual funds pool your money with other investors', and the capital is used for a
diversified portfolio of securities.
Here are some common investments that can help extend retirement options.
The maximum annual IRA contribution is $4,000 if you're younger than 50. Individuals age 50 and older can contribute up to $5,000.
To learn more about investing for your future, visit H&R Block's Investment Center or meet with a financial planner.
Social Security
Your Social Security benefits are the foundation on which you can build a secure retirement. Most financial advisors say you'll need about 70% of your pre-retirement earnings to comfortably maintain your pre-retirement standard of living. If you have average earnings, your Social Security retirement benefits will replace only about 40%. You'll need to supplement your benefits with a pension, savings or investments.401(k) Plans
Your 401(k) plan lets you save for retirement while deferring income taxes on the saved money and earnings until withdrawal. Many employers offer 401(k) plans to which you can contribute a percentage of each paycheck. Many companies even match up to a certain percentage of your contribution. Check with the benefits coordinator at your company to find out more.Individual Retirement Account (IRA)
An IRA is a retirement plan account that provides some tax advantages for retirement savings. There are a number of different types of IRAs, which may be either employer-provided or self-provided plans.- Traditional IRA. Contributions are often tax-deductible, and all transactions and earnings within the IRA have no tax impact. Withdrawals at retirement are taxed as income (except for those portions of the withdrawal corresponding to contributions that were not deducted). Owners must begin taking distributions by April 1 of the year after reaching age 70½.
- Roth IRA. Contributions are made with after-tax assets. All transactions within the IRA have no tax impact, and withdrawals are usually tax-free.
The maximum annual IRA contribution is $4,000 if you're younger than 50. Individuals age 50 and older can contribute up to $5,000.
Mutual Funds, Stocks & Bonds
As an investor in a mutual fund, you become a shareholder in a large portfolio of stocks, bonds and/or money market securities (or some combination of them). Investing in stocks and bonds can be a good way to achieve long-term capital growth, but the market risk can be substantial. Consider subscribing to financial magazine or taking a course to learn more about these options.To learn more about investing for your future, visit H&R Block's Investment Center or meet with a financial planner.
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Frequently Asked Questions
Question: What are the limits on IRA contributions?
Answer: The limit for individuals 50 or older is $5,000. In addition, the adjusted gross income phaseout range that applies to employer plan participants filing a joint return are higher. The range is $75,000 to $85,000.
Question: I rolled the entire amount in 1 of my IRAs to another IRA. How does this affect my tax return?
Answer: You must report the rollover on your tax return, but none of it will be taxable. Enter the amount you rolled over on line 15a, Form 1040, and enter 0 on line 15b. Also enter the word "Rollover" next to line 15b. Note: If the rollover was accomplished by a direct trustee-to-trustee transfer, you should not receive Form 1099-R for this transaction and do not need to report it.
Question: What is the tax rate on distributions from traditional IRAs?
Answer: It depends on the amount of your other income, the amount you withdraw from the IRA and the amount of deductions you can claim. Your taxable income (that is, your income reduced by deductions and exemptions) determines the rate at which you pay tax on your IRA distribution. Keep in mind that if you withdraw the money before age 59½, the income generally is subject to a 10% penalty in addition to income tax.
More IRA & Roth IRA FAQs
Answer: The limit for individuals 50 or older is $5,000. In addition, the adjusted gross income phaseout range that applies to employer plan participants filing a joint return are higher. The range is $75,000 to $85,000.
Question: I rolled the entire amount in 1 of my IRAs to another IRA. How does this affect my tax return?
Answer: You must report the rollover on your tax return, but none of it will be taxable. Enter the amount you rolled over on line 15a, Form 1040, and enter 0 on line 15b. Also enter the word "Rollover" next to line 15b. Note: If the rollover was accomplished by a direct trustee-to-trustee transfer, you should not receive Form 1099-R for this transaction and do not need to report it.
Question: What is the tax rate on distributions from traditional IRAs?
Answer: It depends on the amount of your other income, the amount you withdraw from the IRA and the amount of deductions you can claim. Your taxable income (that is, your income reduced by deductions and exemptions) determines the rate at which you pay tax on your IRA distribution. Keep in mind that if you withdraw the money before age 59½, the income generally is subject to a 10% penalty in addition to income tax.
More IRA & Roth IRA FAQs
Related IRS Forms & Publications
- Form 1099-R - Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
- Form 1099-R Instructions
- Form 5305 - Traditional Individual Retirement Trust Account
- Form 5305-E - Education Individual Retirement Trust Account
- Form 5305-EA - Education Individual Retirement Custodial Account
- Form 5305-A - Traditional Individual Retirement Custodial Account
- Form 5305-R - Roth Individual Retirement Trust Account
- Form 5305-RA - Roth Individual Retirement Custodial Account
- Form 5498 - IRA Contribution Information
- Publication 590 - Individual Retirement Arrangements (IRAs)(Including Roth IRAs and Education IRAs)
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