IRA Contributions Reduce Taxes for Many by Steff Chalk
IRA contributions reduce tax burdens for many working Americans. Employers can help workers to take more control over their own finances by encouraging their employees to keep an eye towards tax-planning for the current year (and last year if it is between January 1 and April 15). If taxes are not front and center, taxes should be present in everyone’s mind so that the quarterly tax obligation never surfaces as a surprise. The more prepared employees are, the better.
Tax season is apt to be less of a surprise if workers start preparing way in advance of the April 15 filing deadline. Employers can help employees take proactive steps to make the upcoming tax season more palatable.
As described in a recent BenefitsPro article, some workers only think of tax season once the April tax-filing date approaches. Employers can be helpful to employees by assisting them in having a head-start on tax season, before this year’s filing deadline.
According to BenefitsPro, there are a variety of ways employers can work with employees to assist them in saving for their golden years. An interesting statistic that might surprise many – according to Bureau of Labor Statistics consumer expenditures data as cited in BenefitsPro, – the average U.S. household spent more money on taxes during 2017 than they did on food and clothing combined! This stresses the importance of helping employees to put a tax management program in place early on in the tax season to improve their overall financial well-being.
The BenefitsPro article also recommends employers encourage employees to prepare for tax season. This can be accomplished by evaluating paycheck withholdings and W-4 elections. Recent Tax Cuts and Jobs Act will result in approximately 20%, or 30 million people, owing money at tax time because they have not withheld enough from their paychecks, according to the Government Accountability Office (GAO). (We are already seeing evidence of that in the evening news!)
The IRS has always put the onus on taxpayers to meet safe harbor requirements by withholding enough from their pay to avoid an underpayment penalty. An individual’s withholdings or estimated payments may need to be adjusted higher to meet these safe harbor requirements if they are projected to be too low. This is easily accomplished by adjusting W-4 allowances or making changes to estimated quarterly tax payments. As tax season gets underway, employers should send information either via U.S. mail or e-mail about when and how employees should expect to receive a tax form for W-2. Receiving any tax form should always serve as a reminder for employees to review and adjust their tax withholdings accordingly – whatever the tax year.
It is also a good idea to prepare for tax season by educating participants on the benefits of making contributions to their 401k at work and, also to other tax-advantaged savings accounts such as IRAs. In the event your organization offers a Roth 401k option, the employer should take a leadership role in explaining to participants the different tax treatments associated with a traditional 401k and a Roth.
Employers can also remind employees that, if they have not maxed out their IRA contributions current year they can still put money in until the April 15th filing date.
Employers can help workers take control of their finances – and should do so early in the tax-year and often. Taxes come with certainty, and in many cases, they arrive at a large expense. Being well prepared is the best defence for avoiding tax withholding surprises.