Tax Season Tips for Retirement

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. 

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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.

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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.

Roth IRA Tax Benefits 

A Roth IRA is another Individual Retirement Account – the key difference being your contributions are made with after-tax dollars. This means you will not have to pay taxes when it’s time to withdraw during retirement. Here are some tips to get the most out of your Roth IRA:

• Tax-Free Growth: Not only are your withdrawals tax-free, but so is your account growth. 

• No RMDs for Roth IRAs: A Required Minimum Distribution (RMD) is the amount you must withdraw from a retirement account each year after a certain age. Roth IRAs are exempt since taxes were already paid.

• No Age Limitation: You can contribute to a Roth IRA as long as you have earned income, at any age (even as a minor or a retiree). 

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If you have a Traditional IRA and want to switch to a Roth, there are instances in which you may want to consider a conversion. Those include:

• You expect higher future tax rates.
  

• You have a low-income year, allowing for a lower tax cost on the conversion.
  

• You want to reduce future RMDs that are required on Traditional IRAs.

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Handling Required Minimum Distributions (RMDs) in Retirement

If you're 73 or older, the IRS requires you to take Required Minimum Distributions (RMDs) from Traditional IRAs and 401(k)s. It's the government's way of ensuring taxes are paid on your retirement savings by spreading out withdrawals over time while also collecting its tax revenue. If you don’t take an RMD, you can face penalties. 

RMDs can be tough to navigate, so consider: 

• A Solid Withdrawal Strategy: Consider spreading distributions throughout the year rather than taking a lump sum.

• Use RMDs for Charitable Giving: A Qualified Charitable Distribution (QCD) allows you to donate up to $100,000 directly to a charity, which can satisfy your RMD while excluding the amount from your taxable income.

• Consider your Other Income Sources: If you receive Social Security or pension income, balancing your RMDs can help manage your overall tax bracket - and your tax bill. 

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Get Tax Ready With PensionBee 

Tax season is the perfect time to make the most of your retirement savings. By rolling over your retirement accounts into a PensionBee IRA, you can combine everything into one easy-to-manage plan. Track your savings, manage transfers, and stay updated on your performance. Every customer gets a personal rollover manager - we call them BeeKeepers - to help guide you through a simple, stress-free process, so you can feel confident about your retirement.