As the end of the year draws near, many people focus on budgeting, planning, shopping, and gifting for the holidays. While it’s easy to get swept up in the spirit of giving to others, retirement account participants should also think of themselves and their future this time of year. This is an opportunity to make final 401(k) and individual retirement account (IRA) contributions for the year. These contributions carry tax advantages and provide immediate and long-term benefits, including investment growth and increased financial security. Prioritizing these contributions before the end of the year is in every saver’s best interest. Read on to learn why.
Maximize Tax Benefits
Participants should take advantage of every opportunity to reduce their taxable income. Contributions to 401(k) and traditional IRAs are tax-deferred, so the money participants put in this year will be deducted from next year’s taxable income, reducing the amount due to the Internal Revenue Service (IRS). The 2024 IRS contribution threshold is $23,000 for 401(k), with a catch-up contribution of up to $7,500 for people ages 50 and over. The cap for traditional IRA contributions is $7,000, with a catch-up contribution of $1,000 for individuals age 50 plus.[1] While Roth IRAs do not come with an upfront tax benefit, there is the long-term reward of tax-free withdrawals for retirees who meet the criteria. Additionally, money that goes in today compounds tax-free.
Another tax advantage that can result from contributions to a retirement account is the Retirement Savings Contribution Credit (Saver’s Credit). This credit incentivizes low-to-moderate-income individuals to save for retirement. Qualifying single filers can receive a credit of up to $1,000 for contributing to an IRA, 401(k), or other approved retirement plan, and married couples filing jointly, up to $2,000. The credit calculation is income and contribution-based. In 2024, the income ceiling for the credit is $38,250 for single filers and $76,500 for joint filers. While the Saver’s Credit eases tax liability, it does not result in a refund. Its purpose is to encourage retirement savings while reducing taxes for those in need[2].
Compound Growth: The Earlier, the Better
The compound growth concept operates on the premise that reinvesting earnings from contributions enables them to grow exponentially with time. The sooner an individual begins saving for retirement, the more time those contributions have to compound and grow. For example, an IRA contribution of $6,500 at the start of 2024, growing at an average annual rate of 7%, will compound to $25,000 in 20 years. An individual making that same contribution of $6,500 in 2025 has lost a year of compound growth. It’s a compelling reason to contribute early, and it’s better to do it at the year’s end than to wait until the following year.
Capitalizing on Employer Contributions
Employers who match 401(k) contributions are sponsoring their employee’s retirement savings. Their contributions also compound over time. However, employer contributions are contingent upon the employee’s contributions, hence the term “match.” Before the end of the year, participants should take stock of their contributions to ensure they get the most from this employer benefit. Not contributing enough to get the full employer match leaves money on the table.
Year-end Review: Evaluate Your Financial Situation
The end of the year is a great time for participants to review and assess their finances, adjust strategies, and set goals for the new year. If contributions to that point have fallen short, it’s an opportunity to bridge that gap. A bonus or pay raise might warrant an increase in retirement contributions for the following year. A year-end check-up can help participants gauge their financial health and progress toward long-term objectives.
Closing out the year with 401(k) and IRA contributions should make your holiday to-do list. Gifting yourself first is a smart strategy that can boost your retirement savings, offer tax benefits, and pave the way to financial security through reduced taxable income, employer matches, and compounding interest. If you want help with your year-end financial review, contact us at SHP Financial today.
Sources
[1]https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
[2]https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-credit-savers-credit
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