Maximizing Retirement Funding at Tax Time
Another tax season deadline has arrived. Hopefully, you are not a last-minute filer and you have already taken care of filing your tax return. As our firm is wrapping up another busy, yet successful tax season, I thought it may be a good time to discuss some retirement funding opportunities you can review to make sure you are maximizing your options when filing your return.
First, let’s review some traditional pre-tax plans. These retirement account vehicles allow you to contribute pre-tax dollars, which reduces your taxable income for the year. The money grows tax-deferred, but you will pay ordinary income taxes when you make withdrawals in retirement.
401(k) – This is the most common pre-tax option that is provided by employers. Unlike some of the other pre-tax plan options, this funding must be completed before the end of the calendar year. Looking ahead, for 2024 you can contribute up to $23,000 ($30,500 if age 50 or older).
Traditional IRAs – If you qualify based on income limits, traditional IRA contributions may be tax-deductible up to $6,500 ($7,500 if age 50 or older) for 2023. Unlike the 401(k), you still have until April 15th to make your 2023 contributions.
SEP IRA & Solo 401(k) – These plans have options for those who are self-employed. Depending on factors limiting the threshold amounts, these contribution limits are much higher than the other pre-tax plans discussed. For 2023, SEP IRA contributions may be tax deductible up to $66,000 and the Solo 401k may be tax deductible up to $66,000 ($73,500 if age 50 or older). These plans can still be funded by April 15th or October 15th with a timely filed tax return extension and counted toward 2023.
The other group of plans I want to review are some after-tax plans. Contributions are made with after-tax dollars, but qualified withdrawals in retirement are completely tax-free. Meaning no current tax deduction but with future benefit in mind.
Roth 401(k) – Offered by some employer plans, this allows after-tax contributions and tax-free withdrawals in retirement. Limits are the same as traditional 401(k) and the contributions must be completed by the end of the calendar year. There is ample time to update payroll contributions for 2024.
Roth IRAs – Limits are the same as Traditional IRAs. These contributions offer no immediate tax deduction, but unlimited tax-free growth potential. These plans can also be funded until April 15th to have contributions count toward the 2023 tax year.
Roth SEP IRA & Solo 401(k) – These plans have been created and/or revised by the SECURE 2.0 Act of 2023. With some nuances, the contribution limits are the same as the pre-tax options. Roth versions of the SEP IRA and Solo 401(k) allow after-tax contributions and tax-free growth. These plans can still be funded by April 15th or October 15th with a timely filed tax return extension and count toward 2023.
Tax strategy is key when evaluating pre-tax vs. Roth options. Pre-tax offers an upfront deduction but is taxed later. Roth has no upfront deduction but can build a source of tax-free income in retirement.
No matter which path is right for you, maximizing retirement contributions can pay off through reducing current and future tax liability while building your nest egg. Tax season is the ideal time to review your retirement accumulation plan with your financial advisor.
Published in the Victoria Advocate
Christopher Laughhunn CPA/CFP® is the Tax & Accounting Principal for Keller & Associates CPAs, PLLC and an Associate Advisor for Keller Wealth Advisors.
