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2024 Tax Planning: Retirement Savings for Individuals

March 15 , 2024



Lifespans are increasing and some are living over one hundred years. Now is a good time to review and evaluate your retirement savings. The tax code provides significant incentives for individuals to make contributions to retirement savings and plans, including traditional and Roth IRAs, as well as to employer sponsored qualified and non-qualified plans, including qualified 401(k) plans. A saver’s credit may also be available for investors in certain tax brackets, which further enhances overall savings. The tax law is designed to make it easy for individuals to save for retirement.

 

Tax incentives can include deductibility of contributions, tax deferral on growth of assets in the plan, and potential distribution free of tax, varying on the investment vehicle chosen. The choice of investment that may be best for you depends upon your individual tax and overall financial situation. Regardless of the type of contribution, any contribution should be made as early in the year as possible. If contributions are made consistently over the years, the benefits will be far greater, and the returns will be more stable than those that are made right before retirement.

 

401K Plans

Employees make contributions to a 401(k) plan through a reduction in salary using pre-tax dollars - an “elective deferral.” This means that 401(k) contributions are not included in the taxable amount in Box 1 of the W-2 because the employee’s wages are reduced by the employee’s contributions. However, the salary reduction amount is included in Box 3 for purposes of Social Security taxes and Box 5 for purposes of Medicare taxes. This way, employees are not penalized by losing Social Security credits for their 401(k) contributions. To encourage employee participation in a 401(k) plan and to help make sure these plans are not discriminatory, employers often make matching 401(k) contributions.

 

There are two specific inflation-adjusted limitations placed on the amount of 401(k) contributions in any one year.

  • A limit on the amount of an employee’s elective deferrals.

  • An overall limit on contributions, including employer contributions.

 

For 2024, participants can make 401(k) contributions through elective deferrals of up to $23,000 ($22,500 in 2023). Those who are age 50 or older can make additional “catch-up contributions” of up to $7,500, for a total of $30,500 in 2024 ($30,000 in 2023). Including employer contributions, the maximum 401(k) contribution is the lesser of $69,000 ($76,500 including catch-up contributions) for 2024 and $66,000 ($73.500 including catch-up contributions) for 2023 or 100 percent of compensation whichever is lower.

 

Individual Retirement Account

An individual retirement account (IRA) is a retirement vehicle in which an individual can contribute pre-tax or after-tax dollars. Unlike a 401(k) plan, which are offered by individual's employers, most IRAs are ones that individuals set up themselves. The types of IRAs are:


  • Traditional IRA  An IRA that allows an individual to deduct contributions on their income tax return. An individual may also elect to treat deductible contributions as nondeductible. Earnings in the IRA are allowed to grow tax-deferred and are only subject to income tax when they are distributed. There is no age limit for making contributions. Distributions are required to be taken annually when the IRA owner reaches age 72. The individual may not be able to deduct all contributions if the individual or the individual's spouse participates in a retirement plan at work.

  • Roth IRA  Unlike a traditional IRA, an individual cannot deduct contributions to a Roth IRA and qualified distributions from a Roth IRA are tax free. In addition, contributions can be made to a Roth IRA at any time, and distributions are not required to be taken from a Roth IRA while the individual is alive. The individual's Roth IRA contribution can be limited based on filing status and income.

 

The total amount of an individual's traditional and Roth IRAs contribution in 2024 is limited to the lesser of $7,000 ($8,000 age 50 or older), $6,500 in 2023 ($7,500 if age 50 or older), or his or her taxable compensation for that year.

 

Self-Employed

A self-employed individual may also participate in a SEP IRA (Simplified Employee Pension Plan or SIMPLE (Savings Incentive Match Plan for Employees).

  • SEP IRAs can be contributed up to $69,000 in 2024 ($66,000 in 2023) or 25% of employee compensation.

  • Simple IRAs allow employees to contribute up to $16,000 in 2024 ($15,500 in 2023) with an additional catch-up of $3,500 for those age 50 and older.

 

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