Give Your Retirement Savings a Boost with Tax-Advantaged Accounts
Contributing to a Roth individual retirement account (Roth IRA) and an employer-sponsored retirement plan, such as a 401(k), Simplified Employee Pension (SEP), or Savings Incentive Match Plan for Employees (SIMPLE) IRA is possible, subject to income limits. Each type of retirement account has different annual contribution limits. For instance, the maximum annual contribution for 2024 is $7,000 for Roth and traditional IRAs, with an additional $1,000 catch-up contribution for those 50 or older. However, if you earned less than $7,000, the limit is your total taxable compensation for the year. You can contribute to a Roth IRA at any age as long as you earn taxable income. Additionally, a working spouse can contribute to a Roth IRA on behalf of a nonworking spouse.
The annual contribution limit for a 401(k) is $23,000 for 2023, with an additional $8,000 catch-up contribution for 2024. If you’re unable to contribute the maximum allowed to an employer’s retirement plan, aim to contribute enough to max out your employer’s match. It is essentially free money that can help accelerate the growth of your nest egg. Keep in mind that if your modified adjusted gross income (MAGI) reaches a certain threshold, the amount that you can contribute to a Roth is reduced or eliminated.
Invest in Your Financial Future
Maximizing contributions to both a Roth IRA and an employer-sponsored retirement plan can help you save as much in tax-advantaged retirement accounts as the law allows, optimizing tax benefits and allowing for earlier retirement. However, knowing the tax implications of different retirement accounts is crucial, considering factors like shifting tax brackets and changing tax rates over time. Contributing diligently and accurately, particularly in meeting your employer’s matching contribution levels, may allow you to retire comfortably—or even early. By utilizing both 401(k) and Roth IRA accounts, you can balance tax-free and taxable income during retirement, providing an essential tax diversification benefit.