How to Enhance Retirement Security and Optimize Tax Savings

How to Maximize Retirement Security and Reduce Tax Expenses

Retirement planning can often seem overwhelming, but there are strategies that can help enhance your retirement security while optimizing tax savings. In this article, we will explore some exceptions to the Internal Revenue Service’s (IRS) calendar-year basis and how they can benefit you in reducing your 2023 tax bill.

For individuals who are not enrolled in a workplace retirement plan, contributing to an individual retirement account (IRA) can be a smart move. You can deduct up to $6,500, or $7,500 if you were 50 or older, for the year 2023. The deadline for making your 2023 contribution is April 15, 2024. Contributions to a traditional IRA will lower your adjusted gross income (AGI) on a dollar-for-dollar basis, potentially making you eligible for other tax breaks tied to your AGI.

If you have a company retirement plan but earn less than a certain amount, you may still qualify to deduct part or all of your IRA contributions. The deduction phases out for single taxpayers with AGI between $73,000 and $83,000, and for married couples filing jointly with AGI between $116,000 and $136,000. If one spouse is covered by a workplace plan while the other is not, the uncovered spouse can deduct the maximum contribution as long as their joint AGI does not exceed $218,000. There is also a partial deduction available for couples with AGI between $218,000 and $228,000.

For individuals who worked for themselves in 2023 or had a side gig, there is an opportunity to contribute even more money towards retirement. By setting up and contributing to a Simplified Employee Pension (SEP) IRA, self-employed workers, small businesses, and sole proprietors can significantly lower their tax bill. The deadline for setting up and contributing to a SEP IRA is April 15, or October 15 with an extension. In 2023, you can deduct contributions of up to 20 percent of net self-employment income, with a maximum contribution of $66,000.

Contributing to a Roth IRA for the year 2023 is another avenue to consider. While contributions to a Roth IRA are after-tax and do not lower your tax bill, they provide tax-free withdrawals if you are 59½ or older and have owned the Roth for at least five years. Additionally, contributing to a Roth IRA safeguards your savings from potential future tax hikes.

However, it is essential to note that there are income limits associated with Roth IRAs. For 2023, single taxpayers with modified adjusted gross income (MAGI) of $138,000 or less can contribute the full amount. Those with MAGI between $138,000 and $153,000 can make a partial contribution. For married couples filing jointly, the full contribution is available if their MAGI is $218,000 or less, with a partial contribution allowed for MAGI between $218,000 and $228,000.

In the past, only pretax contributions were allowed for SEP IRAs. However, recent legislation has enabled SEP providers to offer a Roth option. It is important to note that due to the novelty of this change, finding a provider who offers a Roth SEP may be challenging.

By taking advantage of these exceptions and making strategic decisions about your retirement contributions, you can enhance your retirement security while optimizing tax savings. Consider consulting with a financial advisor or tax professional to determine the best approach for your specific situation. Planning ahead and utilizing these opportunities can make a significant difference in your financial future.