Contributing to a 401(k) plan can save you thousands of dollars on your 2023 tax return, but you need to meet the year-end contribution deadline. Retirees must take withdrawals from their 401(k)s and traditional IRAs before the end of the year to avoid a stiff tax penalty. Here’s how to maximize the value of your retirement accounts before the end of the year.
Remember these year-end retirement account deadlines:
— Meet the 401(k) contribution deadline.
— Take required minimum distributions.
— Donate your IRA distribution to charity.
— Qualify for the saver’s credit.
— Take more time for IRA contributions.
[Read: New 401(k) Contribution Limits for 2023]
Meet the 401(k) Contribution Deadline
Deposits to your 401(k) plan are typically due by the end of the calendar year. However, many people contribute to 401(k) plans via payroll withholding, and it might take your company a pay period or two to process the change.
“It really is a good idea for savers to aim to initiate their transactions a little earlier than the deadline,” says Ted Mitchell, vice president of public relations at Fidelity Investments. “At the very least, aim for two to three weeks earlier.”
The 401(k) contribution limit for 2023 is $22,500. Those age 50 and older are eligible to deposit up to an additional $7,500 in catch-up contributions for a maximum possible deposit of $30,000.
Boosting your 401(k) contributions could significantly decrease your 2023 tax bill. A 50-year-old worker who pays a 24% effective tax rate and maxes out a 401(k) would reduce their tax bill by $7,200 ($30,000 x 0.24). Even a $1,000 contribution would save $240 in taxes.
“Each dollar contributed reduces your overall tax bill, so that can have an immediate impact,” saysSteve Sivak, a certified financial planner and founder of Innovate Wealth in Pittsburgh.
[Read: 401(k) Mistakes to Avoid.]
Take Required Minimum Distributions
For many, distributions from 401(k) plans and traditional IRAs must be taken by Dec. 31 each year after age 72. Starting in 2023, the age to begin taking required minimum distributions is 73. The penalty for missing a required minimum distribution is 25% of the amount that should have been withdrawn in addition to regular income tax on the distribution. If the required minimum distribution is corrected in a timely manner within two years, the excise tax could drop to 10%.
You get extra time to take your first required minimum distribution. For instance, if you turn 73 during 2024, you will have until April 1, 2025, to take your initial required minimum distribution. However, your second and all subsequent distributions will be due by Dec. 31 each year. Waiting until April to take your first distribution means you will need to take two distributions in the same year, which could result in an abnormally high tax bill.
Roth 401(k)s have an annual distribution requirement, but Roth IRAs do not. You might opt to roll over all your Roth 401(k) funds to a Roth IRA prior to turning 73. “A Roth 401(k) plan that has a zero balance as of Dec. 31 will not be impacted by required minimum distribution requirements on the Roth 401(k) assets,” says Ajay Kaisth, a certified financial planner for KAI Advisors in Princeton Junction, New Jersey.
Donate Your IRA Distribution to Charity
IRA owners who are age 70 1/2 or older can avoid paying income tax on part or all of their required distribution if they directly transfer an IRA withdrawal to a qualifying charity. An IRA charitable contribution of up to $100,000 can also be used to satisfy the minimum distribution requirement.
“If you are a retiree over 70 1/2 not needing your distributions, you can avoid paying income tax on your required minimum distributions by donating up to $100,000 of your distribution to charity,” Kaisth says. “To qualify for the tax break, charitable distributions must be paid directly from your IRA to a qualified charity by the end of the calendar year.”
[Read: How to Donate to Charity From Your IRA.]
Qualify for the Saver’s Credit
If your adjusted gross income is equal to or less than $36,500 as an individual, $54,750 as a head of household or $73,000 as part of a married couple in 2023 and you contribute to a retirement account, you might be able to qualify for the saver’s credit. This tax credit is worth 10%, 20% or 50% of retirement account contributions of up to $2,000 for individuals and $4,000 for couples, with the exact amount of the credit depending on your income.
“You can get the deduction, and then lower- and middle-income people can get a saver’s credit on top of that,” Kaisth says. “This is different from a tax deduction. A tax credit is a dollar-for-dollar reduction of gross tax liability.”
Take More Time for IRA Contributions
While 401(k) contributions are generally due by the end of the calendar year, you have until your tax filing deadline in April 2024 to make an IRA contribution that will qualify you for a tax deduction on your 2023 return. You can contribute to an IRA shortly before filing your taxes to get a nearly immediate reduction in your tax bill.
If you decide to wait until the beginning of 2024 to make the contribution, be sure to indicate that the funds are for 2023. That way, you’ll be able to contribute again during 2024. You could aim to put in as much as possible to help build a nest egg that will support you in the years to come.
More from U.S. News
Retirement Checklist for Open Enrollment
Can I Retire at 65 With $5 Million?
How Can I Earn $100, $200 or $500 per Month in Guaranteed Income in Retirement?
Year-End Retirement Planning Deadlines for 2023 originally appeared on usnews.com
Update 10/13/23: This story was previously published at an earlier date and has been updated with new information.
