The benefits of reinvesting your tax relief in the pension plan: 40% more savings when you reach retirement. The employer of investment funds and pension plans, Invesco, has quantified the beneficial effects of contributing to the plan that the Treasury returns to us thanks to its tax advantages.
One of the main attractions of pension plans is the possibility of deducting contributions in personal income tax, which allows reducing the tax bill, deferring the payment of taxes at the time of redemption, and, consequently, generating additional savings to that achieved by way of contributions.
As of the fiscal year 2022, for a participant resident in a common territory, the maximum annual contribution to pension plans amounts to 1,500 euros per year and the maximum annual deduction in personal income tax, which consists of reducing the taxrelief base, will be the lesser between 1,500 euros and 30% of net earnings from work and/or economic activities.
- 2,000 euros.
- 30% of net income from work and/or economic activities.
Reinvest the relief, a way to multiply the results
One way to boost savings for retirement with relatively little effort is to reinvest the tax savings generated annually by contributions in the plan itself. Let us not forget that said tax saving will depend on the taxpayer’s marginal rate and the contributions made.
Thus, a participant with a marginal rate of 30% and who has contributed 1,000 euros throughout a fiscal year, will be saving 300 euros on his personal income tax bill. Whoever has a marginal rate of 45% and makes the maximum contribution of 2,000 euros in 2021, could achieve a tax saving of 900 euros.
Saving becomes even more important if we see saving for retirement in perspective, as a process that, ideally, should last three or four decades. Can you imagine the effect of reinvesting the allowance for all that time?
This is something that Invesco, the Association of Collective Investment Institutions and Pension Funds, has done, which has determined that reinvesting the tax savings from contributions to pension plans in the plans themselves means that the amount accumulated in the pension plan in a moment of accessing retirement is 40% higher than in the case of not doing so.
An example in numbers:
- We assume a participant who saves 1,000 euros per year in pension plans (just under 3 euros per day), would accumulate a capital of 26,870 euros after 20 years, without reinvesting the annual tax deductions. However, reinvesting each year’s tax savings in the Pension Plan, the accumulated final balance would amount to 37,326 euros, that is, 40% more.
This simple exercise of reinvesting tax savings in the plan itself can make a difference when landing in retirement. Similarly, it will always be a good decision to save any extraordinary or unexpected income.
A good time to proceed with this reinvestment and prevent these tax savings from going to other superfluous expenses that usually arise in summer.
Remember that if you exceed the tax limit for contributions, you have the following 5 tax years to deduct the contributions. If you exceed the financial limit of 1,500 euros per year (applicable from 2022), you can redirect contributions to investment funds, good complements to pension plans.
EDA REVEALS TAX RELIEF EXPANSION FOR EARLY TECH INVESTORS
TAX CREDIT INCENTIVE FOR ANGEL INVESTORS DOUBLED
On July 10, the Economic Development Authority formally launched an expansion of the Angel Investor Tax Credit program, an economic incentive intended to entice investors to support technology startups considering locations in New Jersey.
The previous scheme provided a refundable tax exemption of up to 10 percent of an investment.
Under the expansion, the incentive doubles to 20 percent and can go as high as 25 percent for investments in low-income communities, federal “opportunity zones,” or businesses owned by women or people of color.
A product of the federal tax abatement law of 2017, opportunity zones allows investors to protect earnings from income taxes by investing in certain low-income communities for up to 10 years. There are 8,000 Opportunity Zones across the country and 169 Opportunity Zones spanning 75 municipalities in New Jersey’s 21 counties.
According to the Angel Investor Tax Credit Program, the tax exemption is guaranteed money that the investor will get back even if their investment fails. With an investment of $100,000, for example, the sponsor is guaranteed to walk away with no less than $20,000. The other $80,000 is ultimately a risk the investor will have to take.
Between the program’s creation in 2013 and May 31, 2019, the Economic Development Authority, which oversees the program, approved 1,186 applications for 85 New Jersey-based businesses totaling at least $534 million, according to the agency.
EDA Executive Director
“Innovation is what enables the New Jersey-based start-ups of today to become the leading New Jersey-based companies of tomorrow. It drives sustainable economic growth at a time when reestablishing New Jersey’s position as a national leader in innovation is critical to building a stronger and fairer economy,” EDA Executive Director Tim Sullivan said in a statement.
“This is why the Governor’s comprehensive economic plan identified the expansion of the Angel Investor Tax Credit as an impactful way to support early-stage businesses and ensure New Jersey is home to innovative businesses for years to come. Sullivan added.
The state’s largest incentive programs, the Grow New Jersey corporate tax breaks and the Economic Redevelopment and Growth gap financing program for residential projects that awarded billions of dollars in incentives in 2013, expired July 1.
Gov. Phil Murphy, a critic of Grow NJ and ERG, refused to sign legislation extending the program by seven months to buy time for him and legislative leaders to discuss a new set of incentives.