One of the best money moves you can make this year is maximizing contributions to your deductible or nondeductible retirement plan. Whether you’ve contributed all year or have yet to start, here are a few tips to get the most from tax-advantaged retirement plans.
1. Know your contribution limits.
Try to contribute as much as the law allows so you get the most benefit, but don’t go over the annual contribution limit. If you contribute too much to your retirement account, you may have to pay double the taxes.
If you have an Individual Retirement Arrangement (IRA), the contribution limits for 2021 and 2022 are $6,000 ($7,000 for any taxpayer aged 50 or older at the end of the tax year). If you are married and filing jointly, each of you can contribute up to that amount in your retirement accounts.
For Roth IRAs, the amount you can contribute in 2021 starts to phase out when your modified adjusted gross income reaches $125,000 ($144,000 in 2022) or $198,000 if married filing jointly or a qualifying widow/widower ($204,000 in 2022).
If you contribute more than the limit to your IRA account, all excess contributions are taxed at 6 percent per year as long as the extra amounts remain in the account. To avoid the tax, consider withdrawing the amount over the limit or taking out any income earned on the excess contribution.
The maximum contribution to 401(k), 403(b), and 457 plans for 2021 is $19,500 (increasing to $20,500 for 2022 contributions).
Keep in mind, if you’re in a Deferred Compensation Plan, called a 457(b), you’re subject to a limit that includes both your contributions as well as those made by your employer.
No matter what plan you have, TaxAct® calculates your maximum contribution for you through our step-by-step interview.
2. Know your deadlines.
If you’re just starting to contribute to an IRA for 2021, don’t fret. Contributions can be made until the due date of your 2021 tax return, which is April 18, 2022.
However, contributions to a 401(k) or similar plan are different. All pre-tax contributions are deposited directly from your paycheck throughout the year. Therefore, you can’t add outside money to boost your tax break.
But some employers allow employees to contribute year-end bonus money to their 401(k). Just make sure to let them know before the money is paid to you.
Talk with your employer soon if you wish to add any bonus money to your retirement account.
3. Make your contributions automatic.
The beauty of a 401(k) deduction is that it’s automatic. It’s hard to miss money deducted before you receive your paycheck, right? If you ever want to increase your contribution, contact your employer.
With an IRA, it’s easier to procrastinate. However, you can make it automatic by having a portion of each paycheck deposited into a separate account or with an automatic transfer from checking to a special savings account every month.
4. Move money from other accounts.
Money for IRA contributions doesn’t have to come from your checking account and this month’s budget. The same benefits are available if you transfer money from a brokerage or savings account.
If you’re worried about squeezing your monthly budget, consider moving money from an alternate account to your checking instead.
You can only contribute cash to a retirement plan, however. Other assets, like stocks, are not considered regular contributions.
Just remember to keep all your financial objectives in mind before moving money to a retirement account.
5. Make periodic payments.
With an employer retirement account, you’re already making monthly periodic payments.
If you have an IRA, consider sending small contributions to your brokerage or other institution. Quarterly or even monthly payments are a good way to slowly add money throughout the year.
It can be a lot less painful than coming up with the money all at once.
6. Earmark a financial windfall.
If you receive a windfall, such as winnings from a contest, one option is to add it to your IRA.
First, estimate the tax on the amount received. Then place that amount in a special tax account or immediately send it to the IRS. This ensures you’re covered come tax time.
This works for bonuses, federal or state tax refunds, proceeds from selling assets, and so on.
Don’t let that good fortune slip away — pay yourself first by putting it in your retirement account!