Fortifying Your Retirement: IRS Raises 401(k) Contribution Limits for 2024
In a move that spells good news for American workers planning for their retirement, the IRS has recently announced an increase in the 401(k) plan contribution limits for the year 2024. This update offers individuals a golden opportunity to bolster their retirement savings and secure their financial future. Let’s delve into the details and explore how this change can benefit you.
What are the New 401(k) Contribution Limits for 2024?
In 2024, employees will be able to contribute up to $23,000 into their workplace 401(k) plans. This marks a significant increase from the previous limit of $22,500 in 2023. This additional $500 in contributions can make a substantial difference in the long run, helping you grow your retirement nest egg more effectively.
Catch-Up Contributions for Those Over 50
For individuals aged 50 and above, there’s even better news because IRS allows you to make additional “catch-up” contributions towards your retirement planning. This applies not only to 401(k) plans but also to 403(b) and most 457 plans, along with the federal government’s Thrift Savings Plan (TSP). In 2024, if you fall into this category, you’ll have the opportunity to contribute up to $30,500, including the standard contribution limit.
Supercharging Your Individual Retirement Account (IRA)
While the 401(k) plan updates are exciting, the IRS has sweetened the pot for Individual Retirement Accounts (IRAs) as well. For those who prefer this retirement savings vehicle, you’ll be pleased to hear that the contribution limits for IRAs have also been increased. Starting in 2024, you can contribute up to $7,000 annually, up from the previous limit of $6,500. However, the catch-up deposit for IRAs will remain at $1,000.
The Benefits of Maximizing Your Contributions
Now that we know about the increased contribution limits, it’s essential to understand that we can use this to do tax planning for the year 2024.
First Step Towards Tax Planning is to Understand Which Tax Bracket You Will Fall Into
You can only really plan the future by knowing your current situation. Figure out which federal tax bracket you are in and where you will be in the year 2024. Now that you know where you stand, let’s discuss some tax planning strategies that can lower your tax bill and save you some money. This will make retirement planning easier!
IRS allows high earners to defer a portion of their income for future years for “highly compensated employees.” Check whether your employer can give a deferred compensation package. You can access these funds when an action is triggered, such as retirement, buying a new house in the future, or for the higher education of your kids. This money is only tax deductible in its entirety. This can lower your income in the current year and provides you the option of getting paid in the future based on your need or upon retirement, where you might be in a lower tax bracket.
Understand Tax Deduction Requirements
Before you start your tax planning for the new tax year, you should review every available IRS deduction as well as their requirements. Taking the above steps will help prevent your tax deductions from being filed at the end of the calendar year.
Retirement Saving Strategies
Saving through retirement is one standard method of minimizing taxation. Using traditional retirement savings accounts such as 401K or traditional IRA accounts can reduce gross income. IRS has boosted the contributions limit; use that to maximize your tax savings and reduce your tax liabilities. You don’t have to depend on the employer-sponsored plan to start saving towards your retirement. When you are self-employed, the IRS allows you to invest in a SEP IRA or SIMPLE IRA to reduce your taxable income. Maximizing contributions to these retirement accounts can help you save more on taxes and defer the payment until retirement.
Make sure you understand the difference between types of Individual retirement accounts and how they can help you save more on taxes.
Tax Deductions Are Not the Same as Tax Credits
Understanding tax deductions and tax credits can make tax planning much more straightforward. Both reduce the taxes. But knowing the difference will help you to make retirement planning more efficient and maximize your savings. Tax deductions are certain expenses incurred that could be deductible as part of the tax return that the taxpayer paid. The tax cut limits the amount you can claim as a taxpayer. Tax credits are more effective as they reduce the tax burden dollar for dollar.
Use Dependent Care Flexible Spending Accounts
Dependent Care FSA is a type of benefit provided by employers. They are used to pay for certain dependent care expenses incurred in order for one or both parents to work. These expenses could include childcare, daycare, and before- or after-school programs. DCFSAs can help you save up to 30% on your dependent care expenses because you pay for the services with pre-tax dollars. That means you’ll pay less in taxes and save more money. It is important to remember, however, that DCFSAs come with an annual limit on how much you can contribute per year. Be sure to check your plan’s limits before contributing.
Use Capital Gains and Losses Judiciously
Capital gains and losses are an essential part of retirement planning. Gains can help you maximize your investments, while losses can help you offset taxes on those gains. It is critical to understand the tax implications of capital gains, as well as tax planning strategies for minimizing the amount owed to Uncle Sam. If you plan on investing for long-term goals such as retirement or college savings, it is worth looking into ways to minimize the taxes you pay on capital gains. Doing so can help you keep more of your hard-earned money in your pocket. Offloading loss-making investments before the end of the financial year can also be a valuable personal tax planning strategy for reducing your tax burden and offset capital gains made throughout the year.
Start Investing Early
Start investing as soon as possible! There are many options available besides 401(k)s and IRAs, such as Health Savings Accounts or just personal investment accounts. The sooner you start planning your retirement, the more time there is for compounding interest to work its magic. With every investment you make, you are putting yourself in the best position to take advantage of potential gains. Investing early also provides more time to balance your portfolio and adjust for any losses or changes in the market. It’s important to remember that investing is a long-term game – allocating money for short-term goals should come first! Making intelligent investments now can help set you up for success and
Work on Your Entrepreneurial Dreams
You don’t have to be a millionaire to become an entrepreneur. In fact, you can start small and work your way up. Often times, it takes hard work and dedication to build something from the ground up – but it’s worth it in the end. With patience and a little bit of luck, you could find yourself running a successful business or making passive income. Expenses you make to set up your business entity can help you lower your taxes and put more money back into your pocket.
As you get ready to close the curtain on 2023 and get your ‘A’ game on to start 2024 on the right foot. Start thinking of ways to invest in your future and plan for your retirement. Ask yourself what you need to do today to help you reach your goals tomorrow. Tax planning early on is going to help you achieve your financial freedom sooner. Whether it’s starting a side hustle, investing money in stocks or real estate, or finding a mentor – you have the power to make something great out of the coming year! Whether you are a DIY person or you need help in tax planning, take action now to set yourself right for financial success in the year. Start small and work your way up, but soon, you’ll be reaping the rewards of your hard work and dedication.
How Can NexGen Taxes Help?
It’s important to plan for your retirement and file your taxes accurately and promptly. With the updates happening in the Tax laws every year, it gets challenging to keep track of all the changes that might impact your personal situation. When it comes to filing your taxes, it’s not worth taking any risks and doing it on your own.
NexGen Taxes is a tax filing platform. We connect you with licensed CPAs or EAs on the network who can file your taxes so that you don’t have to do it on your own. Reach out to us today to get started.