If you’re 50 or older, there is one benefit to reaching this milestone that you may be overlooking: tax breaks aimed right at you. Now you can contribute more to your Roth or traditional individual retirement account (IRA), to your employer-sponsored plan or to your health savings account (HSA) than you could when you were younger. You can even exclude more income from your tax computations.
Congress included some of these provisions in the Economic Growth and Tax Relief Reconciliation Act, which took effect in 2002, out of concern that the boomer generation had not saved enough for retirement. Congress included other tax-saving provisions, such as a bigger standard deduction, in the Tax Cut and Jobs Act of 2017.
If you’re behind on your retirement savings, the tax law gives you a chance to catch up. And if you’re in retirement, or near it, the tax code allows you to pay a bit less in taxes. That’s a combination you shouldn’t pass up.
Contribute more to your retirement fund
For 2023, the contribution limit for employees who participate in 401(k) and 403(b) programs, most 457 retirement saving plans and the federal government's Thrift Savings Plan has been increased to $22,500, from $20,500 in 2022. Employees 50 and older can contribute an additional $7,500 (up from $6500 IN 2022), for a total of $30,000.
The contribution limit for a traditional or Roth IRA is $6,500 for tax year 2023. The catch-up is $1,000, the same as for 2022. It is $3,500 for a Savings Incentive Match Plan for Employees (SIMPLE) plan, up from $3,000 in 2022.
Many folks are missing this opportunity. Despite generous catch-up provisions for those 55 and older, just 16 percent of those who are eligible are making these contributions, according to the Vanguard Group’s “How America Saves 2022” report.
At the same time, data from the National Retirement Risk Index compiled by the Boston College Center for Retirement Research indicates that half of American households won’t be able to afford their current standard of living once their regular paychecks stop. As of June 2020, 50 percent of married retirees were relying on Social Security payments for at least half of their income; for single people, that number was 70 percent. As of November 2022, the average Social Security retirement benefit is estimated at just $1,632 a month.
Those retirement contributions can lower your tax bill
Aside from making your retirement more comfortable, contributing to a tax-deferred retirement plan, such as an IRA or a 401(k), also reduces your taxable income — which, in turn, reduces your income taxes. Thanks to that reduction in taxes, increasing your contribution won’t take as much of a bite from your paycheck as you might think. If you earn $75,000 a year, for example, a 5 percent contribution to your 401(k) would put $144 into your account for each biweekly paycheck. Assuming a 25 percent tax rate, your take-home pay would fall by just $108, according to Fidelity Investments.