50 or Over? How to Turn Your Tax Bill Into Retirement Savings.
Laurence Hale, AAMS®, CRPS®
Principal/Managing Partner, Investment Advisor & Chief Investment Officer
Tax day is months away, and while most of us would rather think about holiday festivities than taxes or retirement planning, taking some time now to do just that could really pay off, especially if you’re over 50.
Here’s how…
If your end of year tax estimates show you’re going to owe taxes, you can help to reduce that tax liability by making an increased contribution to your retirement account. Since retirement account contributions are not taxed, you’ll reduce your taxable income by the amount of your contribution. There are limits to how much you can contribute each year, but if you’re 50 or older you can contribute more than the usual limits through a catch-up contribution.
What are catch-up contributions?
If you are 50 or older, or you will reach age 50 by the end of the year, you may be able to make contributions to your IRA or employer-sponsored retirement plan above the normal contribution limit. This is called a catch-up contribution, and it’s designed to help you make up any retirement savings shortfall by bumping up the amount you can save in the years leading up to retirement.
Catch-up contributions can be made to traditional and Roth IRAs, as well as to 401(k) plans and certain other employer-sponsored retirement plans. But if you participate in an employer-sponsored retirement plan, check plan rules — not all plans allow catch-up contributions.
How much can you contribute as a catch-up contribution?
How much you can contribute depends on the type of retirement plan you have and the tax year for which you are making the contribution. Here are the limits for various retirement plan types in tax year 2023:
- 401(k), 403(b), or governmental 457(b) plans have a regular annual contribution limit of $23,000 and a catch-up contribution limit of $7,500, for a total possible contribution of $30,500. (403(b) and 457(b) plans also have special catch-up rules that may apply.)
- SIMPLE plans have a regular annual contribution limit of $16,000 and a catch-up contribution limit of $3,500, for a total possible contribution of $19,500.
- Traditional and Roth IRAs have a regular annual contribution limit of $7,000 and a catch-up contribution limit of $1,000, for a total possible contribution of $8,000.
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When should I make a catch-up contribution in order to reduce my 2023 tax burden?
The deadline for contributing to your retirement account so that it gets credited to the 2023 tax year is April 15, 2024. This is true for both regular contributions and catch-up contributions. But if you make your contribution after the first of the year, just be sure to indicate that you’d like it credited to the 2023 tax year; otherwise, it will be automatically be credited to 2024.
How can I continue to maximize my retirement savings going forward?
Tax time shouldn’t be the only time you think about how to increase your retirement savings. If you want to live well in retirement, you’ve got to plan well and invest well consistently all year long. A financial professional can provide invaluable experience and assistance in ensuring you stay on the path toward achieving your financial life goals.
At Weiss, Hale and Zahansky Strategic Wealth Advisors we use our proprietary Plan Well, Invest Well, Live Well™ strategic process to help our clients do just that. See how we can help you to create a Plan Well, Invest Well, Live Well™ strategy for you and your loved ones now.
Authored by Principal/Managing Partner Laurence Hale, AAMS®, CRPS®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com.
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