As government spending has risen and revenue fallen with COVID-19,1 some believe that an increase in taxes could be on its way. In fact, in a recent study, consumers said that higher taxes were a top concern, second only to the spread of COVID-19. A full 55% of consumers were concerned that taxes might reduce their ability to accumulate money for retirement.2 While there’s not much you can about the tax rates, below are some ideas to consider help you prepare for potentially higher taxes.
Contribute to your tax-deferred investments
If you haven’t maxed out your contributions to eligible retirement plans, that might be your first consideration. Every pretax dollar you contribute to a defined contribution plan such as a 401(k), 403(b) or IRA takes a dollar off your taxable income, thus reducing your tax burden. By putting money in tax-deferred vehicles, you can postpone paying taxes on earnings until you withdraw them.
Investing post-tax money — money you’ve already paid taxes on — can also be a helpful tool in your overall retirement savings strategy.
And, if you qualify for a Roth IRA, or have a 401(k) plan Designated Roth Account option, that can be another option to consider. Although you’ll pay taxes on the amount that you invest, none of your earnings will be taxed if you hold the investments for at least five years and withdraw funds according to certain guidelines.
- Maximum contributions to a 401(k) or 403(b) for 2020 and 2021: $19,500, plus $6,500 if you’re age 50 or older.
- Maximum contributions to an IRA, ROTH IRA: $6,000 or $7,000 if you’re age 50 or older.
Contribute to your HSA
If you have a high deductible health insurance plan, you may also have access to a health savings account, or HSA. Like the money you contribute to a 401(k), the money you contribute to an HSA goes in pretax, reducing your current taxable income. However, if you use that money to pay for qualified health-related expenses or wait until you retire at age 65, your withdrawals are tax-free. And, once you reach a certain balance in your HSA, you can invest that money in the available investment options, giving you more potential for growth.
- Maximum contribution to an HSA for 2021: $3,700 if you have individual coverage or $7,200 if you have family coverage.
Give to charity
If you can afford to help others, donating to charity is a great way to reduce your current taxable income as well. Thanks to a special one-time provision in the Coronavirus Aid, Relief, and Economic Security Act (CARES) of 2020, you can gift cash up to an amount equal to 100% of your adjusted gross income in 2020. In other words, you can give as much as you want, up to what you earned this year, to your favorite charities. To qualify, your contributions must be made in cash to a qualified charitable organization in the 2020 calendar year.
Talk to your financial professional about other ideas
A financial professional can be a great resource for ideas on how to make the most of your income, now and in the future. Since the start of the pandemic, consumers are feeling more confident in their financial professionals, with 41% saying they trust their financial professional more now than ever. In general, those with a financial professional tend to be more engaged with their investments, understand the role of taxes in their overall financial strategies and retirement plans, and generally feel more confident in their ability to retire comfortably or stay retired.2
2Equitable Q3 Consumer Pulse Study, October 2020.
Please be advised that this article is not intended as legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.
This informational and educational content does not offer or constitute, and should not be relied upon as, financial, tax, accounting or legal advice. Your unique needs, goals and circumstances require and deserve the individualized attention of your own financial, tax, accounting and legal and other professionals. Equitable Financial Life Insurance Company and its affiliates do not provide tax, accounting, or legal advice or services.