January is a time for reflection, planning, and action, both personally and professionally. Taxpayers can use this extra motivation to get their finances on track by making choices to help them now and in the future. One of these choices should be examining your retirement savings. The U.S. tax system gives taxpayers incentives to save by offering tax perks through different types of retirement accounts. It’s not too late to take advantage of these tax saving options for 2024. Taxpayers have until the due date of their tax return (April 15, 2025) to make contributions for the 2024 tax year. Let’s break down some of the most common options and how they can help you save both for the future and on your tax bill.
1. 401(k) Plans
A 401(k) is a retirement savings plan that many employers offer. You can contribute part of your paycheck before taxes, which lowers your taxable income for the year. Here’s the scoop:
- Tax Perks: Since contributions are made with pre-tax dollars, you pay less in income taxes now. Plus, the money grows tax-free until you withdraw it.
- Contribution Limits: In 2024, you can put in up to $22,500 if you’re under 50, and $30,000 if you’re 50 or older (thanks to catch-up contributions).
- Employer Match: Many employers chip in by matching a percentage of your contributions—don’t leave this free money on the table!
2. Individual Retirement Accounts (IRAs)
IRAs are personal retirement accounts you can open on your own. The two main types are Traditional IRAs and Roth IRAs, each with unique benefits. For 2024, you can contribute up to $7,000 or $8,000 if you’re 50+ (limit subject to gross income test).
- Traditional IRA:
- Contributions might be tax-deductible, depending on your income and whether you have a 401(k) or similar plan at work.
- Your money grows tax-free until you withdraw it, but you’ll pay taxes on withdrawals in retirement.
- Roth IRA:
- You contribute after-tax dollars, so there’s no tax break upfront.
- Withdrawals, including earnings, are completely tax-free as long as you follow the rules.
- The contribution limit is subject to phase-out ranges based on your AGI. If you’re single and earn more than $161,000 (or $240,000 as a married couple), you won’t qualify to contribute in 2024.
3. Health Savings Accounts (HSAs)
While not specifically for retirement, an HSA can double as a retirement savings tool if you have a high-deductible health plan.
- Tax Advantages: Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.
- Bonus for Retirement: After age 65, you can use the funds for any expense—not just medical—without penalties (though you’ll pay income tax on non-medical withdrawals).
Tips for Getting the Most Tax Savings
- Start Early: The sooner you start saving, the more time your money has to grow.
- Don’t Miss Out on Employer Matches: Contribute enough to your 401(k) to get the full match—it’s free money!
- Mix and Match Accounts: Use both tax-deferred (e.g., Traditional IRA) and tax-free (e.g., Roth IRA) accounts to give yourself options in retirement.
- Keep Up With Limits: Check the annual contribution limits so you’re putting in as much as possible.
- Know the Deadline: You have until April 15, 2025, to make IRA and HSA contributions for the 2024 tax year and claim those tax benefits on your return.
Final Thoughts
By understanding your retirement plan options, you can pick the right accounts to fit your goals. Schedule a new client consultation with Redbud Tax Services for questions regarding your options. Our next blog post will discuss more retirement plan options for the self-employed and small business owners.
