By Brandon Miller–
It’s not that I have anything against Uncle Sam, I mean we just had a huge party for him on the 4th of July, but I want you to hold on to as much of your retirement savings as possible. Want to have extra money to spend on picnic supplies and rosé this summer and next? Yeah, you do. Here’s a red, white, and blue guide to help you take full advantage of tax-saving opportunities as you build your retirement nest egg.
Contribute to a 401(k) Plan
This is retirement saving 101. If your employer offers a 401(k) plan, it’s a fantastic way to save for retirement and reduce your taxable income. Contributions made with pre-tax dollars lower your taxable income for the year. In 2024, you can contribute up to $23,000, or $30,500 if you’re 50 or older.
Max Out Your IRA Contributions
Individual Retirement Accounts (IRAs) are another excellent option. Traditional IRAs offer tax-deductible contributions, lowering your taxable income for the year. The contribution limit for 2024 is $7,000, or $8,000 if you’re 50 or older. Roth IRAs, on the other hand, don’t offer immediate tax breaks, but your withdrawals in retirement are tax-free. I’m team ROTH all the way because I’m for short-term pain, long-term gain.
Take Advantage of Employer Matches
This is essentially free money! Ensure you contribute enough to get the full match, which can significantly boost your retirement savings without additional cost to you.
Utilize a Health Savings Account (HSA)
An HSA is a great way to save for healthcare costs in retirement while enjoying tax benefits. Contributions are tax-deductible, grow tax-free, and withdrawals for qualified medical expenses are also tax-free. For 2024, the contribution limit is $4,150 for individuals and 8,300 for families, with an additional $1,000 catch-up contribution if you’re 55 or older. Ideally, don’t spend this money; let it accumulate and then you can roll it over for when you are in retirement when your expenses will likely be higher.
Consider a SEP IRA or Solo 401(k)
If you’re self-employed or own a small business, consider a SEP IRA or Solo 401(k). These accounts allow for higher contribution limits, offering substantial tax-deferred growth. For 2024, you can contribute up to 25% of your net earnings from self-employment, up to $69,000.
Utilize Catch-Up Contributions
If you are fabulous 50 or older, take advantage of catch-up contributions. These allow you to contribute more to your retirement accounts, providing additional tax savings. As stated previously, you can contribute an extra $8,000 to your 401(k) and an extra $1,000 to your IRA annually. Not too shabby!
Invest in Tax-Advantaged Accounts
Consider investments that offer tax advantages, such as municipal bonds, which are often exempt from federal (and sometimes state) taxes. Tax-managed mutual funds and ETFs (Exchange-Traded Funds) are designed to minimize capital gains taxes, helping your investments grow more efficiently.
Use a Roth Conversion Strategy
Another reason I’m Team Roth is that, if you expect to be in a higher tax bracket in retirement, you should consider converting some of your Traditional IRA funds to a Roth IRA. You’ll pay taxes on the converted amount now, but future withdrawals will be tax-free. This strategy can be particularly advantageous if you anticipate higher taxes in the future.
Defer Taxes With Annuities
Annuities offer tax-deferred growth, meaning you won’t pay taxes on your investment gains until you withdraw the money. This can be an effective way to manage your taxable income and grow your retirement savings more efficiently.
Plan for Required Minimum Distributions (RMDs)
Once you turn 72, you must start taking Required Minimum Distributions (RMDs) from your Traditional IRA and 401(k) accounts. Plan for these withdrawals to manage your taxable income and avoid penalties. Roth IRAs, however, do not have RMDs, which can be a significant tax advantage.
By strategically using these tax-saving steps, you can maximize your retirement savings while minimizing your tax burden. Start early, stay informed, and make the most of the available tax-advantaged accounts and contributions. Happy saving, and here’s to a financially secure retirement!
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always, please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Brio Financial Group is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Brio Financial Group and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Brio Financial Group unless a client service agreement is in place.
Brandon Miller, CFP®, is a financial consultant at Brio Financial Group in San Francisco, specializing in helping LGBT individuals and families plan and achieve their financial goals. For more information: https://www.briofg.com/
Money Matters
Published on July 25, 2024
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