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Most people think of April 15 as the key deadline for taxes. Although that is the due date for filing your tax return, when it comes to minimizing taxes, the key date is December 31. To take advantage of most tax breaks—for retirement savings, charitable giving, and more—you need to act before year-end. If you don’t want to spoil your year-end festivities, it’s best to start early.
The tax deadline for 2015 is almost here, but one of the most powerful tax-reduction strategies you can use is available to you at any time, and can help you save on your 2016 taxes so next year’s filing season goes a little more smoothly.
The University of Texas System offers not one, but two plans that allow you to defer a portion of your income into savings before you pay taxes on it, thus reducing your taxable income for the year. These plans are the UTSaver Tax Sheltered Annuity 403(b) Plan and the UTSaver Deferred Compensation 457(b) Plan.
Contributing to a UTSaver account may be the smartest tax move you can make. For 2016, the maximum amount you can contribute to the UTSaver TSA and DCP plans is $18,000 ($24,000 for people age 50 or older). For someone in the 25% tax bracket, that means the potential for $4,500 to $6,000 current-year tax break per plan. Plus any earnings on the contributions are tax deferred. (With a Roth, your contributions are after tax, but your withdrawals are tax free so long as certain conditions are met.*)
You need to act quickly, though, to maximize your 2016 contributions. The longer you wait to increase your deferral rate, the harder it becomes to maximize the tax-savings potential without sharply reducing your take-home pay.
* A “qualified” Roth distribution occurs when the Roth account has been in place for five taxable years (from the year of first contribution) and one of the following events has occurred: (1) attainment of age 59 ½; (2) disability; or (3) death.
