You Have Less Than 3 Months to Make This Important Tax Move

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Want to pay less tax for 2023? Read on to see what move you’ll want to make ASAP. 

Taxes are an unavoidable expense for working Americans. And heck, even retirees without jobs have tax bills to cover.

But just because you have to pay taxes doesn’t mean you can’t take steps to keep yours as low as possible. And there are different ways to go about that.

For one thing, you could be strategic about claiming the right credits and deductions on your tax return. But contributing to a traditional retirement savings plan like an IRA or 401(k) is another good way to lower your tax bill, since the money that goes into these accounts represents income the IRS can’t tax you on.

But if you’re saving for your retirement in a 401(k) plan, you should know that you only have between now and the end of the year to finish making your 2023 contribution. So if you’re looking to increase that contribution, get moving ASAP.

Know the rules of 401(k) contributions

If this is your first time saving in a 401(k) and you’ve previously stuck with IRAs for retirement savings, you might think you have until next year’s tax-filing deadline to make contributions that count for 2023 purposes. With an IRA, that’s true. But with a 401(k), you only have until Dec. 31, 2023, to contribute money to that account and have it count for 2023 tax purposes. So the time to increase your contributions, if you’re able to, is now.

You should also remember that 401(k) contributions are deducted from your paychecks directly. Any change to your 401(k) contribution for 2023 has to be processed through your company’s payroll department.

It can take time to do that. So even though you have until Dec. 31, 2023, to increase your 401(k) contribution for 2023, if you wait until December to put in for that change, it may not happen in time.

Know the limits for 401(k)s

With a traditional 401(k), every dollar you put in is a dollar the IRS can’t tax you on, up to an annual limit. But it’s important to know what limit applies to you.

If you’re under the age of 50, your 401(k) limit is $22,500 for 2023. If you’re 50 or older, it’s $30,000 thanks to a $7,500 catch-up.

Now, let’s be real — most of us cannot afford to part with anywhere from $22,500 to $30,000. If you’re someone who makes $50,000 a year, for example, and you’re 30 years old, maxing out your 401(k) will mean socking away almost half of your annual income.

But let’s say you’ve only put $4,000 into your 401(k) to date and you’re able to increase your savings rate to get another $2,000 into that account before the end of the year. The sooner you inform your payroll department, the more likely you are to make that contribution in time.

Pumping money into a 401(k) is one of the easiest ways to lower your tax bill. Plus, you get the added benefit of setting yourself up with more retirement income down the line. So if you think you can swing a higher contribution this year than you initially planned for, take action quickly to get that money into your account.

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