Tax Qualified IRA Contributions Reduce Taxes
Tax qualified IRA contributions can perform an excellent job of reducing the overall tax burdens for Americans. Employers are able to help workers to control their finances by encouraging their employees to fund tax qualified IRA contributions during the current year (or for the prior year – if between January 1 and April 15). Taxes should be front and center in everyone’s mind so that any quarterly tax obligation never surfaces as a surprise. The key is to keep employees prepared.
Tax season will be less of a surprise if workers start preparing well in advance of the April 15 filing deadline. Employers are in a position to help employees to make the upcoming tax season more tolerable.
There are a variety of ways employers can work with their employees to help them in saving for their golden years. An interesting statistic that may surprise many – according to Bureau of Labor Statistics consumer expenditures data – the average U.S. household spent more money on taxes during 2017 than they did on clothing and food combined. This fact stresses the importance of employers helping their employees to initiate a tax management program such as funding a tax qualified IRA contribution.
Employers should regularly encourage employees to prepare for the current tax season. This can include evaluating compensation withholding levels and W-4 elections. Recent tax cuts can result in approximately 30 million people, owing money at tax time because of having not withheld enough from their paychecks. (We are currently seeing evidence of this during the evening news programs.)
The IRS has always encouraged taxpayers to meet safe harbor requirements by having employers withhold sufficient amounts from paychecks to avoid an underpayment penalty. An individual’s withholdings or estimated payments should be adjusted to meet the safe harbor requirements. Doing so is easily accomplished by making regular revisions to estimated quarterly tax payments. A good rule is to consider the receipt of any tax form as a reminder to adjust tax withholdings accordingly.
It is also a good idea to continually prepare for tax season by making contributions to the company sponsored 401k plan at work and, by also funding tax qualified IRA contributions. If an employer offers a Roth 401k option, the employer should explain the different tax treatments between a traditional 401k and a Roth contribution.
Employers should encourage workers to take control of their own finances. Taxes are an ever-present obligation.