US Tax News: Reducing taxes is essential to increasing your nest egg when it comes to retirement savings. Thankfully, there are several tactics available to assist you in reducing your tax liability and increasing your retirement savings.
Retirement Account Contributions
One way to lower your tax liability is to make contributions to a retirement account, like an individual retirement account or 401(k). It might be possible for you to postpone paying income tax on your retirement funds until after you retire. On the other hand, improper use of your retirement accounts may result in tax penalties.
Contribute to a 401(k)
You can postpone paying income tax on your retirement savings until the funds are withdrawn from the account by making contributions to a traditional 401(k) plan. Up to $23,000 in 2024 (an increase of $500 from 2023) can be deferred taxes for most workers if the money is deposited into a 401(k), 403(b), or the federal government’s Thrift Savings Plan. You will receive the tax benefit almost immediately if you use payroll deductions for these contributions because fewer funds will be withheld for income taxes.
Contribute to a Roth 401(k)
While the tax treatment of Roth 401(k)s differs from that of traditional 401(k)s, the contribution limits remain the same. The contributions you make to your Roth 401(k) do not immediately result in a tax break. Contributions to a Roth 401(k) are made after taxes; however, after the account is at least five years old, you can take tax-free withdrawals from it at age 59 1/2 and accumulate tax-free investment growth. You can take out the entire amount of the account’s investment earnings tax-free when you retire, and the earnings are not taxed annually.
Contribute to an IRA
Earned income earners can defer income tax on up to $7,000 in 2024 (an increase of $500 from 2023) when they save for retirement in an IRA. However, if you earn more than a certain amount and have a 401(k) account at work, you might not be eligible to claim a tax deduction for your IRA contribution.
Participants in 401(k) accounts with incomes between $77,000 and $87,000 (or $123,000 and $143,000 for couples) in 2024 will no longer be eligible for the IRA tax deduction. When a couple earns between $230,000 and $240,000 in 2024, the tax benefit is eliminated if only one spouse has access to a 401(k) plan through their employer.
Contribute to a Roth IRA
With a Roth IRA, taxpayers can defer paying income tax on up to $7,000 in 2024. By making contributions to a Roth IRA, you may be eligible for tax-free growth on your investments and tax-free withdrawals from at least five-year-old accounts during your retirement.
If your adjusted gross income is between $146,000 and $161,000 for single people and $230,000 and $240,000 for married couples, you will no longer be able to contribute to a Roth IRA. Nonetheless, higher earners might still be able to convert traditional retirement account assets into a Roth allocation.
Make Reimbursement Contributions
If employees contribute catch-up money to their retirement accounts, they are eligible for an additional tax break if they are 50 years of age or older. In a 401(k) plan, older workers can defer taxes on an extra $7,500, for a total tax-deductible contribution of up to $30,500 in 2024, as opposed to $23,000 for younger workers. Those sixty and sixty-three years of age will be able to elect to make additional catch-up contributions starting in 2025. Moreover, catch-up contributions of up to $1,000 in 2024—a total of $8,000—for individuals 50 years of age and above are permitted in IRAs.
Benefit from the Saver’s Credit
Retirement savers who made contributions to an IRA or 401(k) and earned up to $36,500 for singles, $54,750 for heads of household, and $73,000 for married couples in 2023 are eligible for the saver’s credit. The saver’s credit, which is worth between 10% and 50% of the amount contributed, is available on retirement account contributions of up to $2,000 ($4,000 for couples). Saver’s with lower incomes will receive larger credits. In addition to the tax deduction for a traditional retirement account contribution, there is also the saver’s credit available.
Avoid the Penalty for Early Withdrawal
IRA withdrawals prior to reaching 59 Withdrawals from 401(k)s and 1/2 before the age of 55 typically incur a 10% tax penalty. The early withdrawal penalty can be avoided in a number of ways, though. If you use the money for multiple specific purchases, like an IRA distribution for college expenses, a first-time home purchase (up to $10,000), unusually high medical costs, or health insurance following a layoff, you might not be penalised for taking an early withdrawal. If a Roth IRA is at least five years old, you might also be able to withdraw contributions made to it—but not earnings—without incurring an early withdrawal penalty.
Do not forget about required minimum distributions
After the age of 73, withdrawals from most 401(k) plans and IRAs are mandatory. Every distribution from a traditional retirement account is subject to income tax. In addition to the income tax owed, the penalty for not withdrawing the correct amount is 25% of the amount that should have been distributed. If you promptly fix the mistake, the penalty might be lowered to 10%.
All subsequent distributions must be taken by December 31 of each year to avoid the penalty, but your first required minimum distribution is due by April 1 of the year after you turn 73. Starting in 2033, the minimum age at which required minimum distributions must be made will rise to 75.
Put Off Withdrawals from Your 401(k) If You’re Still Employed
Certain 401(k) plans let you postpone withdrawals from your current 401(k) account until you retire, provided you don’t own 5% or more of the company sponsoring the retirement plan and you continue to work into your 70s or beyond. It is still necessary, though, to take required minimum distributions from IRAs and 401(k) accounts linked to prior employment after the age of 73 (75 starting in 2033) in order to avoid the 25% tax penalty.
When to Take Out of Your Retirement Account
According to Sean Lovison, owner of Purpose Built Financial Services in Moorestown, New Jersey, and a certified public accountant, the timing of your retirement account withdrawals may affect your taxes. For example, you are not yet required to take annual distributions from your retirement accounts, but you can take penalty-free withdrawals during your 60s. Reducing taxes on your retirement savings can be achieved by taking distributions from your retirement account during a year with low income.
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