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How Your Tax Return Helps Retirement Planning

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S uppose you've already filed your 2014 tax return or you're about to. Take another look at it. Pre-retirees and retirees can find useful lessons for 2015 and future years. To start, compare your total income to your retirement contributions for 2014. What percent did you put away for tomorrow?

Many mutual fund families, for instance, advise people to save 10% to 15% of their income annually. If you are under 10%, you likely need to do more, fund families warn.

Also, did you get the full employer match in your 401(k) plan, if offered? If not, you left what amounts to a free pay raise on the table.

So be sure you get the full match this year. Increase your 2015 contribution, if necessary.

Next, check your tax bracket. See how much taxable income you'll report on your tax return.

Say you have $100,000 of taxable income on a joint return. You're in the 25% federal tax bracket.

Many people will owe state and perhaps local income tax as well. You might also owe tax due to surtaxes, phaseouts and the alternative minimum tax.

You'll get a better idea of your specific situation by re-running your numbers with a spreadsheet or tax software or asking your tax pro to. But this time, in a what-if exercise, assume you earn more adjusted gross income ( AGI ).

Suppose you increase your AGI by $10,000 in this exercise. Your combined income tax bills (federal, state, local) rise by, say, $3,000. Those higher tax bills stem from your higher income plus your loss of various deductions. Your cumulative tax hit would go up around 30%, if this year's income is similar to last year's.

Test Run

Such insights can help with retirement planning. For example, it can help you see how much tax you'd owe from converting a traditional IRA to a Roth IRA, says Jeffrey Levine, an IRA technical consultant with Ed Slott & Co., Rockville Centre, N.Y.

That type of Roth conversion is attractive to many retirees and people nearing retirement. There's no upfront tax break for a Roth IRA, but all distributions are tax-free after five years and age 59-1/2.

If your tax bills total 30%, converting $20,000 from a traditional IRA to a Roth would add $6,000 to your tax levies. So you might decide to convert less than $20,000.

And if you did a Roth IRA conversion last year, you'll see how much tax you can save with a full or partial recharacterization. Such reversals, back to your traditional IRA, are allowed until next Oct. 15.

Knowing your total tax rate can be very important for retirees. Adding income may also boost the amount of Social Security benefits subject to income tax. That might affect your decision to work part-time, say, or to increase taxable withdrawals from a traditional IRA.

And retirees can see if they'll qualify for the 0% tax rate on dividend income and long-term cap gains.

In 2015, that applies to single filers with up to $37,450 in taxable income, or $74,900 on joint returns.

That's taxable income, after deductions. So you can have more in gross income and still get the 0% tax rate. If you qualify, you might shift assets into dividend payers, and owe 0% tax on the payouts.

Another tactic would be to take long-term gains and owe 0% tax as long as you stay under the $74,900 cap. Even if you go over, only the excess would be taxed at the usual 15% rate.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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