Tax season can feel overwhelming, but when it comes to your retirement savings, a little planning can save you money. Here’s how to make the most of tax breaks, avoid penalties, and keep your retirement on track.
Tax Tips for 401(k)s
401(k) accounts are offered by your employer. You contribute money from your paycheck before taxes are taken out. Here are some essential tips to maximize your 401(k):
- Max Out Your Contributions: If you can, save as much as possible for your retirement. For the 2024 tax year , contribution limits have increased to $23,000 (or $30,500 if you're over 50).
- Grab the Employer Match: If your company offers a match, take it. That’s free money for your retirement!
- Consider Rollovers: If you switch jobs, consider rolling your old 401(k) into an IRA. This can help you avoid fees and keep your tax benefits, so your money keeps working for you.
- Avoid Early Withdrawals: Life can be unpredictable, and money can get tight. While it might be tempting to dip into your 401(k) early, keep in mind that doing so before age 59½ comes with penalties and taxes which can take a big bite out of your savings.
Traditional IRA Tax Benefits:
If your job doesn’t offer a 401(k), an Individual Retirement Account (IRA) could be a great way to save for the future and get tax benefits. With a traditional IRA, you contribute pre-tax dollars, which may reduce your taxable income now while your savings grow for retirement. Here are some important tips to get the most out of your Traditional IRA:
- Lower Your Tax Bill: Generally, what you contribute to your Traditional IRA reduces your taxable income, which lowers your tax bill. The amount you can deduct depends on your income, filing status, and whether or not you participate in a 401(k) or employer-sponsored plan.
- Earnings Grow Tax-Deferred Until Withdrawal: Your savings grow tax-deferred, while withdrawals in retirement are taxed as regular income.
It’s important to know that deduction eligibility depends on your income and whether or not you participate in a workplace retirement plan.
Pro tip: To maximize deduction, contribute before the tax deadline and stay within the annual IRS limits. You can also develop a strategy for withdrawals in retirement that helps manage your tax bracket and lower your tax burden.