Receiving a bump in pay can be a great feeling. Maybe you exceeded your sales goals. Perhaps you got a larger bonus from great performance. Whatever the cause, the first sensation is pride and happiness. Then, worries about taxes start to kick in. Don't worry, just plan. Below are some tips with what to do with your extra savings and ways to reduce your tax bill.
1. Spousal IRA Contribution
If you already maxed out your 401K and your spouse does not work, be sure for them to take the max spousal IRA contribution of $6,000 ($7,000 if they are 50 or older). This should save the family around $2,000 and help move you closer to your retirement or financial independence goals.
2. Roth IRA Contribution
Add to your Roth IRA up to the $6,000 max ($7.000 if you are 50 or older). While you receive no tax deduction for Roth IRA contributions, you will never pay any taxes on investment gains.
Both strategy #1 and strategy #2 are subject to adjusted gross income or AGI limits where the benefits start to phaseout or disappear altogether if you make too much income. However, the IRA contribution itself helps reduce your adjusted gross income dollar for dollar.
3. 529 College Savings Contributions
If you have pre-university aged children, top up their 529 college savings accounts if they are underfunded. A married couple is allowed to contribute up to $30,000 per year per child.
4. Add to Your Emergency Fund
If your emergency fund is short of 6-months in savings, now is a great time to fill it back up.
Receiving an increase in income is always good, With a little tax planning you can ensure that you keep as much of it as possible.