The tax deadline is looming and Drake & Associates financial advisors, Tony Drake, CFP® and Brad Allen are with WTMJ to talk about the most common mistakes people are making with taxes and their retirement.
Probably the biggest mistake is waiting until the last minute. We have two extra days to file this year, because April 15th falls on a Sunday, and Monday the 16th is a holiday. But you don’t want to wait until the last minute. When you’re rushing, it’s easy to make mistakes like typos or wrong calculations. Slow down and take the time to do it right. Here are a few other mistakes people make:
Not Maximizing Retirement Contributions
When you contribute to your 401(k), you are reducing your taxable income for the year. The money you put into a 401(k) also grows tax deferred until you withdraw it in retirement. Younger workers are capped at saving $18,500 per year in their 401(k) and $5,500 in their IRAs for 2018. However, older workers can save an additional $6,000 in a 401(k) and $1,000 in an IRA. Besides the tax benefits, setting up a savings plan is an important part of increasing your retirement security.
Saving in One Place
A lot of people continue to invest in pre-tax accounts, like Traditional IRAs and 401(k)s. But money in these types of accounts will be taxed as you withdraw it. That means your retirement savings won’t go as far as you think it might. A big mistake I see is not having tax diversification, which is just as important as other types of diversification. An account like a Roth IRA will give you tax diversification because your money is taxed upfront, but you can withdraw it tax-free in retirement. You may want to consider shifting money from a Traditional IRA or a previous employer’s 401(k) into a Roth IRA. You’ll have to pay the taxes on it at the time you move the money, which is why some people like to do a partial conversion, only switching over as much as they’re able to pay taxes on this year, and moving more money next year.
No Plan for Charitable Giving
The charitable giving deduction has been popular with taxpayers, but for many people, this year will be the last year they itemize their taxes. That’s because the tax reform raised the standard deduction to approximately $24,000 for married couples. There are still strategies for people who want to donate to charity. If you are over age 70 1/2, you can use your Required Minimum Distributions, or RMDs, from your IRA and send them directly to the charity to avoid paying income taxes on the donation. There are some limitations to this strategy, so you may want to check with your financial professional for more information.
Not Adjusting Withholding
Many of us think of a tax refund as a bonus, but it’s not! It’s your hard-earned money that Uncle Sam has been holding onto all year interest-free. You do not want a large refund, but you don’t want to owe money at tax time either. Ideally, you want to set up your withholding so your return is as close to zero as possible. This is especially important now because you may be in a new tax bracket due to the tax changes that went into effect at the beginning of the year. You will thank yourself come April, 2019 if you take the time now to check your withholding.
The Tax Deadline is Looming
You can get your money quicker by e-filing and using direct deposit. Direct deposit is also a safer way to get your money, because your check isn’t sitting in your mailbox. You can use freefile on the IRS website if you file a qualifying return. Or you can e-file with one of several different tax filing companies. Depending on your annual salary, some of these sites will allow you to file your state and federal taxes for free, but most people will have to pay some sort of fee. Make sure to double check, because these errors can cost you money in your tax refund or flag you for an audit.
If you can’t get all of your paperwork together by the deadline, an extension will give you an extra 6 months to file. But don’t forget, even if you file for an extension you can still get hit with a late payment fee if you owe money on your taxes. Make your best estimate because you still need to pay by April 17th. Then, make sure you get your return filed by October 15th.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Drake & Associates does not offer tax or legal advice.