As the year draws to a close, it's an excellent time to review your retirement plan and make some strategic moves to boost your savings and reduce your taxes. Here are some tips on making the most of the last few months of the year for your retirement goals.
Maximize your contributions to retirement accounts.
If you have a 401(k), 403(b), or similar workplace plan, you can contribute up to $22,500 in 2023, plus an additional $7,500 if you are 50 or older. This is an increase of $1,000 from the previous year, so take advantage of this opportunity to boost your savings. Your contributions are deducted from your paycheck before taxes, which means you lower your taxable income and pay less in taxes. Your employer may also match some or all your contributions, which is free money for your retirement.
If you have an IRA, you can contribute up to $6,500 in 2023, plus an additional $1,000 if you are 50 or older. This is the same limit as the previous year, but it is still a valuable way to save for retirement. You can choose between a traditional IRA or a Roth IRA, depending on your income and tax situation. A traditional IRA allows you to deduct contributions from your income and pay taxes when you withdraw them in retirement. A Roth IRA does not offer an immediate tax deduction, but your withdrawals are tax-free in retirement.
If you have both a workplace plan and an IRA, you can contribute to both if you meet the income and eligibility requirements. However, you may be unable to deduct your IRA contributions if you or your spouse are covered by a workplace plan and your income exceeds certain limits. You can still contribute to a Roth IRA regardless of your workplace plan status, but there are also income limits for Roth IRA eligibility. You can check the IRS website for the latest rules and limits for retirement accounts.
If you have extra money to save for retirement after maximizing your contributions to retirement accounts, you can consider other options such as a taxable brokerage account, a health savings account (HSA), or a 529 plan for education expenses. These accounts do not offer the same tax benefits as retirement accounts, but they can still help you grow your wealth and achieve your financial goals.
Consider a Roth conversion.
One strategy to optimize your retirement savings is to convert some or all your pre-tax accounts, such as traditional IRA or 401(k), to after-tax accounts, such as Roth IRA or 401(k). By doing so, you will pay taxes on the converted amount in the year of the conversion, but you will enjoy tax-free withdrawals in the future.
A Roth conversion can be a smart move if you anticipate that your tax rate will be higher in retirement, or if you want to avoid the mandatory withdrawals that begin at age 73 for traditional accounts. These withdrawals, known as required minimum distributions (RMDs), can increase your taxable income and affect your eligibility for certain benefits and deductions.
To take advantage of this strategy, you need to plan and consider the tax implications of your conversion. You also need to follow the rules and deadlines for Roth conversions, which may vary depending on the type of account you have. For more information, consult a qualified tax professional or visit the IRS website.
Plan for your retirement income taxes.
It is essential to review your retirement income and tax situation. Depending on the sources and amounts of your income, you may face different tax rates and rules that affect your bottom line.
For instance, some of your Social Security benefits may be subject to tax if your income exceeds certain thresholds. Likewise, you may have to pay taxes on your required minimum distributions (RMDs) from traditional retirement accounts, or on your capital gains and dividends from your investments.
To avoid any unpleasant surprises or penalties from the IRS, you should estimate your retirement income taxes and plan accordingly. You may want to adjust your withholding or make estimated tax payments throughout the year, or use strategies such as tax-loss harvesting or charitable giving to lower your tax bill. By doing so, you can optimize your retirement income and enjoy your golden years.