Are your retirement contributions paving the way to a secure financial future or leaving you wondering where you went wrong? Explore the following strategies for maximizing the power of your retirement contributions before tax time arrives.
To make the most of your retirement savings, you’ll need to choose the right type of retirement account since different types offer different tax advantages.
Here are two to research:
Traditional IRAs: Contributions are made with pre-tax dollars, reducing your taxable income. Growth is tax deferred1, meaning you will only pay taxes once you begin withdrawing your funds.
Roth IRAs: These accounts are funded with after-tax dollars, so they do not reduce your taxable income. However, there are no taxes on retirement withdrawals.
A Roth account may be beneficial depending on your current and projected taxes. However, if you anticipate a lower tax rate in retirement, a traditional account might be more appropriate.
After you pick a retirement account, make sure you stick to the IRS contribution limits. Excess contributions can be taxed and penalized. In 2024, the contribution limit for a Roth 401(k) and a traditional 401(k) is $23,000.
American workers leave behind $24 billion2 in unclaimed 401(k) company matches every year. If your employer is one of the 92% that match employee retirement account contributions3, here are some tips to make the most of this valuable perk:
Know your company's matching policy: Understand how much your employer will match your contributions. This information is typically outlined in your employee benefits package.
Maximize the match: Contribute at least enough to get the full employer match. If your budget doesn’t allow this, focus on paying off debt or cutting expenses to avoid leaving money behind.
Consider contributing more: While you only need to contribute enough to get the full match, it can be wise to contribute more if you can afford it. This extra money grows tax-deferred and can significantly boost your retirement savings. Just be mindful of IRS contribution limits.
Sticking with a single retirement account is like having all your retirement eggs in one basket. Diversification1 spreads out your risk and provides greater financial security as you age. Rather than sticking to one account type, look into various asset classes4.
Two great options to start with are municipal bond funds2 or cash-value life insurance policies. Municipal bond funds offer tax-free interest income while certain cash-value life insurance policies provide unique tax advantages such as tax-deferred growth and tax-free death benefits.
But don’t get so busy diversifying that you miss your Required Minimum Distribution (RMD) deadline. Once you reach age 72 (or 73 if the account owner reaches age 72 in 2023 or later), the IRS requires you to withdraw a minimum amount from your retirement accounts each year. Failure to do so can result in hefty penalties.
Financial advisors and tax professionals can help you maximize your retirement contributions and minimize your tax burdens by offering personalized guidance tailored to your financial situation and goals.
Working closely with a financial adviser or tax professional can help you explore various tax-efficient strategies and retirement plans to meet your long-term financial goals.
Look for the following traits in a financial advisor:
Provides proven expertise in retirement planning and tax optimization
Customizes advice based on your individual financial goals
Establishes a trusting, open relationship to discuss your financial goals freely
Make the most out of your retirement contributions this tax season. You can minimize taxes and maximize savings by staying within contribution limits, strategically diversifying1 your investments, and exploring tax-efficient strategies.
Take proactive steps now to prepare for a comfortable retirement and consider consulting with a professional for personalized guidance.
1 Diversification does not assure a profit or protect against market loss.
2 Muni bonds are subject to credit risk which is the risk that the bond issuer may experience financial problems and is unable to pay interest and principal in full.
4 https://www.shrm.org/topics-tools/news/benefits-compensation/one-four-workers-miss-full-401k-match
6 https://www.investopedia.com/terms/a/assetclasses.asp
This article is provided for general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
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