Step 8 – Raise Your Tax Knowledge
Hi, this is Brittney Castro, Certified Financial planner, of Financiallywisewomen.com. Welcome to the 9 STEPS to Becoming a Financially Wise Women Video series.
Whether you’re just starting your career, getting married, buying a home, raising kids, starting a business, approaching retirement, or simply taking control of your finances for the first time, now is the time to get the financial education you need to become a Financially Wise woman.
Step 8- Raise Your Tax Knowledge
Oh the joy of taxes….although none of us like them, we know that taxes are one of the few certainties in life. So instead of cringing every time you hear the word, learn the basics of taxes and make sure you are learning how to incorporate tax strategies into your overall financial plan.
While I am not a CPA, I will provide a brief overview of a few tax strategies so you can start to understand them, an important aspect of becoming a Financially Wise Woman.
Strategy # 1– Contribute to your retirement plan. If you are employed you can elect to contribute to your employer retirement plan, typically a 401k, or 403b. The maximum contribution for 2011 is 16500 with an additional catch up contribution of $5500 for those over age 50. The contributions you make are pre-tax meaning they come off your gross income and reduce your taxable income for the year. Because these accounts are retirement accounts, the money will grow tax deferred. When you take withdrawals in retirement, after age 59 ?, the amount you withdrawal will be fully taxable in that year. So think if it as tax deduction today, grows tax deferred, taxable in future.
If you are self employed you can contribute to a traditional IRA, SEP or Simple IRA, individual 401k, just to name a few.
For those women out there who are not working because you are staying home to take care of the kids, consider having your spouse fund a spousal IRA for you.
This helps ensures you are saving for your retirement even when you are out of the workforce-very important.
Strategy #2– Save into a Roth IRA to provide tax free dollars in the future. A Roth IRA or Roth 401k, work in opposition of a traditional IRA or 401k. The contribution you add to a Roth IRA is not tax deductible today, but it grows tax deferred and if you follow the rules as to when you can take it out, it comes out tax free after age 59 ?. Roth IRA’s do have income limits so as long as your income permits, consider saving into a Roth IRA. Many employers are now offering Roth 401k contributions, which do not have income limits, so you will want to analyze if this is something that is right for you.
Strategy # 3– Work with a tax professional. The tax code is very complex. To ensure you are maximizing all the tax deductions, credits and strategies available to you and your specific situation, you will want to work with a trusted professional who can help you with your options.
Keep in mind that understanding taxes and how they fit into your overall financial strategy is very important and at the end of the day, you are the one responsible for raising your tax knowledge.
Thank you for watching Step 8 of Becoming a Financially Wise Woman, this is Brittney Castro of Financially Wise Women.com. See you next time for our last step!