This Move Could Be Your Greatest Source of Tax Savings in 2023

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It’s definitely one worth making. 

Paying taxes can be a drag, whether you earn $50,000 a year or $500,000. And so chances are, you’d like to pay the IRS as little as possible.

There are different steps you can take to minimize your tax bill. You could, for example, write off expenses you incur in the course of running a business or being self-employed, like internet service and office supplies. These deductions are perfectly legal. You can also, if you own a home, write off the interest you pay on your mortgage (assuming you itemize on your taxes and don’t just claim the standard deduction).

But there’s another really effective move you can make to slash your tax bill substantially. And it’s one worth making this year if you can swing it.

Max out that retirement plan

Saving for retirement is important. Without savings, you might struggle financially later in life.

Thankfully, the IRS offers tax incentives for retirement plan contributions. And if you put money into a 401(k) or traditional IRA account, you can exempt a large portion of your income from taxes.

Now, the IRS does set limits on how much money you can put into an IRA or 401(k). And to be clear, those limits can change from one year to the next.

In 2023, you can put up to $6,500 into an IRA and up to $22,500 into a 401(k) plan if you’re under the age of 50. If you’re 50 or older, you get a $1,000 catch-up option in an IRA and a $7,500 catch-up option in a 401(k), bringing these limits up to $7,500 and $30,000, respectively. This means that if you’re 52 years old and max out your IRA at $7,500 this year, that’s $7,500 of income the IRS won’t tax you on. That’s a pretty sweet deal.

One big misconception about catch-up contributions is that you need to be behind on savings to take advantage of them. Not so. You could have $2 million in your retirement plan and still make a catch-up contribution if you so wish.

Plus, many companies that sponsor 401(k) plans match worker contributions to some degree. Those employer contributions don’t count toward the aforementioned limits.

So let’s say you’re 52 and have a 401(k) through work, and that your employer will match up to 100% of your first $3,000 in contributions. This means that you can still put $30,000 into your 401(k) this year, and between your contribution and your employer’s, you’ll have funded that account with $33,000.

An option worth taking advantage of

Many people are not in a financial position to max out a 401(k) or even an IRA this year. And if that’s the boat you’re in, don’t sweat it. Not only is inflation still driving living costs up, making it harder to carve out room for retirement plan contributions, but a lot of people are still recovering from job or income loss during the early days of the pandemic.

But even if you can’t max out your IRA or 401(k) contributions for the year, do your best to sock away as much money as you can in one of these accounts. Doing so won’t just save you money on taxes — it could also help set the stage for the financially secure retirement you deserve.

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