If you’re among the smart and fortunate people who have contributed regularly to 401(k) plans, you have some tax planning to do now.
A long bull market has swelled the 401 accounts of today’s pre-retirees. And now that required minimum distributions are delayed until age 73, those larger distribution checks could land you in a higher tax bracket than you have considered.It’s a high-class problem to have: too much retirement money pushing you into a higher tax bracket when you retire. But if you’re among the smart and fortunate people who have contributed regularly to 401 plans, you have some tax planning to do now.
The big question is whether your current and future retirement savings should be done on a pre-tax or after-tax basis.All the gains in a Roth retirement account come out free from federal income taxes . And there are no RMDs from a Roth account during your lifetime. The tradeoff is that you don’t get a current tax deduction for your contribution to the plan.
Starting next year, high-earners will lose a valuable perk. For those age 50 and older, a “catch-up” contribution of up to $7,500 is allowed to a company 401 plan. But in 2024 those contributions can no longer be made to a traditional plan. Instead, the catch-up contributions can only be put into after-tax Roth 401 accounts if the worker earned more than $145,000 in the previous year.
IRA contributions can be made only if you have earned income from work. In 2023, the maximum annual IRA contribution amount limit is $6,500, or $7,500 if you are age 50 and older. This can be done in a combination of traditional and Roth IRA accounts, as long as you stay below the combined limit.
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