As tax season approaches, many individuals are gearing up to tackle their tax returns, eager to file early and expedite the arrival of their tax refunds. However, upon completing their tax calculations, some may find that their expected refund is lower than in previous years. Several factors could contribute to this decrease. For instance, with savings accounts offering higher interest rates in 2023, individuals may have earned more interest income, thus reducing their refund amount. Similarly, taking on additional work or a side job might result in higher wages, potentially impacting the final refund amount despite taxes being paid along the way.
While a smaller tax refund may not necessarily be disadvantageous—in fact, it means the IRS held onto less of one’s money throughout the year—for those aiming to avoid a diminished refund next year, there’s a crucial step to consider: maximizing contributions to retirement accounts.
Maximizing contributions to an IRA or 401(k) not only fosters long-term savings for retirement but also offers immediate tax benefits by shielding a portion of one’s 2024 income from taxes. For employees with a 401(k) plan through their employer, the prospect of employer matching contributions presents an added incentive. These matching dollars do not count toward the annual contribution limit, providing an opportunity to boost retirement savings without impacting personal contribution limits.
In contrast, traditional IRAs do not offer employer matching contributions, simplifying the decision-making process for those considering this retirement savings route. Additionally, individuals contributing to a Roth IRA or Roth 401(k) still enjoy tax benefits such as tax-free investment gains and eventual tax-free withdrawals. However, it’s important to note that contributions to Roth retirement plans do not reduce taxable income for the 2024 tax year, unlike contributions to traditional retirement accounts.
It’s essential to be mindful of contribution limits for IRAs and 401(k)s, as these limits are subject to change annually. Staying informed about these limits ensures individuals maximize their retirement savings while optimizing tax benefits within legal boundaries.
In summary, while a diminished tax refund may not necessarily be a cause for concern, taking proactive steps to maximize retirement contributions can not only secure one’s financial future but also potentially enhance tax savings for the upcoming tax year.
