Here Is How To Reduce Your Tax Bill Through Retirement Savings

Reduce your taxes, and contributions to retirement funds are eligible for tax deductions and credits. Those that save for retirement may qualify for a variety of tax benefits. Some retirement accounts permit you to postpone paying income tax on your retirement funds, while others enable you to avoid paying tax on investment profits. You may also be entitled to the saver’s tax credit for your contributions to a retirement account. 

Here’s how to reduce your tax liability while growing future wealth.

Contribute to an Individual Retirement Account (IRA).

You can delay paying income tax on contributions to an individual retirement account of up to $6,500. A worker in the 24% tax bracket who contributes the maximum amount to this account will save $1,560 on federal income tax. The funds will not be subject to income tax until they are taken from the account. IRA contributions aren’t due until your tax-filing deadline in April, so you may enter an IRA contribution while calculating your taxes to determine how much you can save by transferring funds to an IRA.

Increase your 401(k) deductions.

Numerous 401(k) plans permit you to log in and boost your 401(k) withholding, qualifying you for a larger tax deduction. This form of workplace retirement plan allows employees to avoid paying income tax on up to $22,500 in contributions in 2024. A worker in the 24% tax bracket who makes maximum 401(k) contributions would save $5,400 in taxes. 

Those with higher tax rates benefit the most from 401(k) contributions. An employee in the 37% tax rate who maxes out his 401(k) plan might save $8,325 in taxes. Couples qualified for a 401(k) plan at work, and married can contribute to a 401(k) in each of their names for twice the tax savings.

Catch-up contributions 

After you turn 50, you can make catch-up contributions to 401(k)s and IRAs. In 2024, workers age 50 and older are eligible to postpone taxes on an extra $7,500 in 401(k) contributions for a maximum of $30,000. A 55-year-old employee in the 24% tax bracket who contributes the maximum to a 401(k) would save $7,200 in taxes, $1,800 more than younger workers. Additionally, older workers may contribute up to $7,500 to an IRA, $1,000 more than their younger counterparts.

Open a spousal IRA.

While couples cannot establish a combined IRA, each spouse can establish an individual IRA and receive twice the tax deduction. If a couple maxes out two conventional IRAs, they may delay paying income tax of up to $13,000, which increases to $15,000 if both partners are 50 or older. Even if one pair member did not work, you could save in an IRA in either spouse’s name.

Make 401(k) and IRA contributions in the same year.

Some employees may contribute to a 401(k) and an IRA in the same year, but high incomes cannot claim tax deductions for contributions to both plans. 401(k) participants can claim a tax deduction for an IRA contribution if they earn less than $83,000 ($136,000 for couples), with the benefit being phased away in 2024 for individuals earning more than $73,000 ($116,000 for couples). If only one spouse qualifies for a 401(k) plan, the IRA tax deduction is tapered between $218,000 and $228,000 of combined income.

Consider a Roth IRA.

Contributions to a Roth IRA are not immediately tax deductible. However, investment profits are not taxed as long as the funds remain in the account. And if you withdraw after age 59 1/2 from an account at least five years old, you will never be taxed on the increase of your investments. In 2024, the opportunity to contribute to a Roth IRA is eliminated for workers earning between $138,000 and $153,000 as an individual and $218,000 and $222,000 as a married couple.

Think about a Roth 401 (k).

Contributing after-tax dollars to a Roth 401(k) might allow you to defer paying tax on investment gains until retirement if you postpone withdrawals. In retirement, Roth 401(k) distributions are typically tax-free. Roth 401(k)s have a far greater contribution maximum than Roth IRAs; eligible employees can contribute up to $22,500 in 2024 or $30,000 if they are 50 or older. You may be eligible for a 401(k) match on Roth 401(k) contributions, but employer contributions will be deposited into a standard tax-deferred retirement account rather than the Roth account.

Perform an IRA conversion.

You may convert your standard IRA balance into a Roth IRA by paying income tax on the converted amount. You may be able to lower your lifetime tax liability if you convert in a year with particularly low earnings. For instance, if you anticipate being in the 24% tax bracket in retirement but pay a 12% tax rate on the converted amount, you will have reduced the amount of tax owing on your retirement assets.

Put your tax return into your retirement.

You may fund your IRA with your tax refund. Using IRS Form 8888, you may have your tax refund instantly deposited into an IRA. If you meet the IRA contribution deadline, you can utilize your return to lower your current or future year’s tax payment. If you contribute to an IRA between January and April, you must designate whether the contribution should be applied to the prior or current tax year.

Claim the credit for savers.

Workers with modest incomes who save for retirement in a regular 401(k) or IRA may be eligible for a tax credit in addition to the tax deduction. In 2024, the saver’s credit is available to retirees who earn less than $36,500 as an individual, $54,750 as a head of household, or $73,000 as a married pair. 

The credit ranges from 10% to 50% of retirement account contributions up to $2,000 for individuals and $4,000 for couples, with the largest credit going to those with the lowest earnings. The maximum value of the saver’s credit is $1,000 for individuals and $2,000 for married couples.

Make an eligible charity contribution.

After age 72, retirees must take annual withdrawals from regular 401(k)s and IRAs and pay income tax on each withdrawal. However, if you make a qualified charitable gift from your IRA, you can avoid paying income tax on the transfer. Over-70-and-a-half-year-old IRA owners can transfer up to $100,000 tax-free to a qualified charity, and the transaction meets the minimum distribution requirement. Couples who file a combined tax return are exempt from paying income tax on charitable IRA contributions of up to $200,000. But you do not need to make a substantial contribution to qualify for the tax deduction. If you are in the 24% tax rate, contributing even $100 directly from your IRA to a charity will save you $24 in taxes.