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Reducing LAST YEAR’s Tax Liability


The tax year of 2009 has been over for months and you have already filed your taxes, or maybe you haven’t.  You aren’t happy with the return you are getting or maybe you even owe money.  You wonder, “Is there anyway to get more money back on my 2009 tax return?”  The answer, yes there is a way to get more money back from your 2009 tax year return.  The key to doing this?  Quite simply, retirement account contributions can be attributed to the previous tax year as long as the contributions are made before April 15 of the following year.  The paragraphs below list the types and amounts that can be contributed to various retirement plans in 2010 to receive a tax deduction on your tax return for 2009.

Traditional 401(K)

The 401(K) is a retirement plan which arises from Section 401(K) of the Internal Revenue Code.  401(K)s are generally retirement plans sponsored by employers for their employees. However, specific sections of the code also make it advantageous for self-employed people to use 401(K)s.  These self-employed 401(K)s are typically referred to as Solo(K)s, The Self Employed(K), or even the Baby(K).  401(K) contributions are excludible from income.

The annual deductible contribution limit to a 401(K) is $16,500.  For those turning 50 and older this year, “a catch-up” or additional contribution of $5,500 is allowed annually.  When distributed, the distribution is taxable as ordinary income.

Roth 401(K)

The Roth 401(K) is similar in all respects to the traditional 401(K).  However, instead of contributions being deductible, contributions are taxed presently, but not taxed upon distribution.  Roth 401(K) contribution limits are the same as traditional 401(K) limits.

Traditional 403(B)   

This is generally a government employee retirement plan which is equivalent to the private sector 401(K) plans.  The annual contribution limit is $16,500, while allowing a $5500 annual “catch-up” contribution for those 50 and older.

Roth 403(B)

This retirement plan is the same as the traditional 403(B) (above).  However, it allows no deduction for contributions made as any Roth plan does not tax distributions when made, just the same as the Roth 401(K).

Traditional IRA

The traditional IRA is an individual retirement account.  These can be set up by an individual at a bank.  The annual contribution limit for 2010 is $5000 and the law allows $1000 annual “catch-up” contribution limits for those turning 50 years of age and older this year.  Under the traditional IRA, contributions are deductible, but distributions are taxed when made.

Roth IRA

This is also an individual account.  The contribution limits are the same as the traditional IRA, however they are not deductible.  Staying true to “Roth” form, the contributions are not deductible, but the distributions do not get taxed.

There is also an interesting caveat with the Roth IRA this year.  In 2010, those making any amount (including those making over $100,000 per year) are allowed to convert their Traditional IRAs into Roth IRAs.  While taxes will have to be paid to account for the difference, some advantages are tax free income in retirement and no required minimum distributions (RMDs) at age 70½, where as with the traditional IRA, RMDs are required.  Also, a Roth IRA can be a tax free legacy and the Roth holder has access to the assets of the plan without penalty.

Simplified Employee Plan (SEP)

A SEP is a retirement plan where the employer contributes directly to an IRA of an employee.  The employer contributions are excluded from the employee’s gross income and an annual contribution of up to $49,000 is allowed.  The employee is also allowed to contribute to the plan.  SEPs are set up by completing IRS form 5305-SEP and retaining the form as evidence of the plan.  The form 5305-SEP is not submitted to the IRS.


This plan is established by an employer by completing forms 5304-SIMPLE (when the employee can choose the financial institution) or 5305-SIMPLE when the employer chooses the financial institution which will receive the contributions.   The annual limit of contributions is $11,500 annually, while allowing $2,500 in annual catch-up contributions.


As blanket advice, it is best to maximize your tax return by investing in your future and your retirement.  Contributing money to a retirement plan not only invests in your retirement, but also places the money in a place where creditors are usually unable to garner the money.  There is still time to contribute to your retirement plan in order to reduce your taxes payable or increase your return amount.  Knowing the basics and amounts that can be contributed to the respective plan is always valuable knowledge to have when you are planning for your retirement.  If you have further questions about retirement plans, feel free to call Marcus at The Center for further details.

By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors