The opportunity to get some last-minute tax breaks is almost over. In most cases, you have until Dec. 31 to contribute to your retirement accounts for a 2023 tax deduction. You do not want to miss this opportunity to save money and avoid taxes.
Take Out Your Required Minimum Distribution
If you must take out a required minimum distribution (RMD), do not forget to do it before the year’s end. Make sure to take out the full amount so that you are not penalized 25 percent of the amount you should have withdrawn. Even though the penalty is not as much as it was recently (50 percent), 25 percent is still more than you want to lose.Max Out Your Matching Contributions
Whether you have a 401(k) or an individual retirement account (IRA), you want to contribute a minimum of what your employer will match. Since it is free money, claim all of it you can. If you do not have other savings accounts, you might consider contributing the maximum allowable amount to boost your retirement savings.A 401(k) enables you to contribute much more than a traditional IRA. If you are younger than 50, you can contribute a maximum of $22,500, but $30,000 if you are 50 or older.
An IRA allows you to contribute up to $6,500 if you are younger than 50. People 50 or older can contribute another $1,000 for a total of $7,500.
The Self-Employed Can Contribute to a Solo 401(k)
Contributions to a solo 401(k) have one major difference when you can make contributions. The solo version, which is for sole proprietors, has the same limits on contributions, Kiplinger says, but you can make them up until tax time.Consider a Health Savings Account If You Need More Savings
If you have already maxed out your retirement accounts, you may want to open a health savings account (HSA). These accounts allow you to save for retirement and to withdraw the money without a tax penalty when used for qualified medical expenses. It can help reduce your medical costs because taxes are not due on the money withdrawn for that purpose.To open an HSA, you must get a high-deductible health insurance plan first. All of your contributions are tax-deductible, and they grow tax-free. Contribution limits are $3,850 for individuals and $7,750 for families. If you are 55 or older, you can add another $1,000. In 2024, you can contribute up to $4,150 as a single and up to $8,300 for family coverage. Unused money is rolled over into the next year and does not expire.
Money in the account can also be invested. Schwab suggests leaving two or three years’ worth of contributions in cash for medical expenses and investing the rest. Once you turn 65, you can use the money for anything without penalties, but you must pay taxes on withdrawals.
Deadlines for Contributions to Retirement Accounts
If you are going to contribute to a 401(k), you have until Dec. 31 to make it. IRAs are different, letting you make contributions up until April 15.Check on Your Account Growth
It is a good idea, Fool says, to check the performance of your retirement accounts at year’s end. The stock market (as represented by the benchmark S&P 500 Index), as of Dec. 5, is up 19.5 percent compared to last year. That is a lot of growth.Your retirement accounts should reflect considerable growth, too. If you only see a couple of percentage point difference, you may need to diversify your portfolio more. Spread out your investments to more companies in different market segments.
Look at the various fees you are paying now for the investments in your retirement account, Fool advises. They are based on the type of investments you have. If they are high you may want to choose some lower-cost index funds.
Donate to Your Favorite Charity
If you donate directly from your retirement account to an approved charity, you will not have to pay taxes on the amount donated. You can also reduce taxes by sending part or all of your RMD to charity.You can also contribute any time up to a limit—if you want a deduction. The deduction is limited to up to 60 percent of your adjusted gross income, but lower percentages may apply. Any carryover amounts from 2020 and more recently are also limited to 60 percent. The Internal Revenue Service says you can also contribute to approved charitable organizations in Canada, Mexico, and Israel.
Increase Your Contributions
If you expect to get a pay raise in 2024, now would be a good time to consider increasing the size of your retirement account contributions. Make the commitment before you get used to larger paychecks, and then decide against it later.Rollover Money Into a Roth Account
Even though it will not help you this year with taxes, you need to consider whether or not it can help your taxes in the future if you do a Roth conversion and roll over money from an IRA or 401(k) into a Roth account. Roth accounts have the advantage of not having any RMDs, which lets the money grow as long as you want.It will be necessary to pay taxes on any money you withdraw, so you may want to roll over smaller amounts over a several-year period. NerdWallet says you can make contributions to a Roth account while you continue to get an earned income.
Time is running out to save money on taxes before the year’s end. You can still contribute more to your retirement account or make charitable contributions—both steps will help reduce taxes. Talk to a financial advisor to learn how much of a difference your contributions will make on this year’s taxes.
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