You Have 3 Months to Act on One of the Easiest Tax Breaks You Might Snag This Year

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Want to lower your 2023 tax bill? Read on to learn about one of the most effective ways to do that. 

Paying taxes is something all of us have to do. But most of us would rather hand over as little money as possible to the IRS, right?

The good news is that there are plenty of steps you can take to legally lower your taxes and reserve more of your hard-earned money for yourself. But there’s one specific move that’s just about your easiest bet for shielding income from the IRS.

It pays to max out your 401(k) — or get as close as possible

The nice thing about 401(k) plans is that they come with generous contribution limits. This year, you can put up to $22,500 into a 401(k) if you’re under age 50, or $30,000 if you’re 50 or older. By contrast, IRAs max out at $6,500 for savers under 50 and $7,500 for those 50 and older.

Of course, if you’re an average earner, finding $22,500 or $30,000 a year for retirement savings might seem impossible. And rest assured that many people are not able to max out a 401(k).

But the more money you put into a traditional 401(k), up to these limits, the less income the IRS gets to tax you on. So let’s say you’re 40 and can’t come up with the full $22,500 you’re allowed to stick in your 401(k). If you manage to sock away $5,000, hey, that’s $5,000 of earnings that won’t be subject to taxes. If you fall into the 22% tax bracket, that means you’re lowering your 2023 tax bill by $1,100.

You only have a limited amount of time

One nice thing about IRAs is that you have until the following year’s tax-filing deadline to make contributions. So let’s say you want to max out an IRA at $6,500 for 2023. You actually get until mid-April of 2024 to get that money into your account. So if, for example, you’re getting a year-end bonus payable on Jan. 1, you’re able to use it for 2023 IRA purposes.

But 401(k)s work differently. With a 401(k), you only get until Dec. 31 to finish funding your account. So if you’re eager to shield more income from the IRS, now’s a good time to increase your 401(k) contributions.

To do so, contact your benefits or payroll department and ask what the process is for making that change. You may be able to do it online, depending on your employer. In fact, one good thing about 401(k)s is that you can change your contributions whenever you want. The only thing is that it may take a few pay periods for those changes to go through.

Another thing you should know is that many employers match employee contributions to a 401(k) to some degree. But those matching dollars don’t count toward the aforementioned limits.

So, let’s say you’re 40 and you are getting close to maxing out your 401(k) for the year. You may have another $500 coming your way from your employer in the final quarter of the year in the form of a match. But that $500 won’t count toward your limit, so if you’re able to put in a full $22,500 out of your paychecks, it pays to go for it.

Paying taxes may be unavoidable, but that doesn’t mean you can’t take steps to lower how much you pay. And if you’re able to pump more money into your 401(k) before the end of the year, you might end up really happy come tax season.

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