One of the things that my team and I prioritize here at Top Hat Tax & Financial Services is keeping the lines of communication open with our San Diego clients. Especially when difficult times hit (we’re continuing to think about those in Florida and the Carolinas as they process and deal with the aftermath of Hurricane Ian – it’s tough to imagine some of these losses). This is one of the reasons why I write to you regularly.
But there are others. I want to help make your life better. I want to shine a flashlight on areas of concern and get you the most up to date information on taxes and other financial matters. I want to see my San Diego clients equipped to face those challenges … and overcome them.
So I write about a wide range of topics. I’ve been doing this long enough to gain satisfaction in this part of my “job.” I feel like I’m doing it right when I can bring you a stabilizing perspective. With the swirl you’re (no doubt) experiencing every time you check the headlines or take a quick scroll through your social media feed (which I suggest you keep to minimum levels), I want you to find calm and truly helpful insight from a source you KNOW, and so you can trust.
All of this is one long intro to give you perspective about why I’m writing on what I write on today, even as inflation continues to rear its ugly head and take a toll on your real income.
Oh — and a quick reminder that next week is the tax filing extension deadline (Monday, October 17), so if you haven’t squared that away, we’ll need to take care of it ASAP:
Now … let’s keep our minds above the fray and make some wise choices about our finances and look at navigating the complex world of retirement contribution limits, together:
How San Diego Taxpayers Can Navigate Retirement Contribution Limits
“A photograph of the beach house where you and your husband can envision spending your retirement will remind you to bump up the contribution to your 401(k).” – Jean Chatzky
It’s always a good idea to look ahead at your taxes – retirement withdrawals, selling big assets, deductions, and dependents – keeping all that paperwork organized for when you need it in about six months …
Funneling cash to your retirement accounts is also usually smart, even in this nasty stock market. No matter how finicky Wall Street gets, the IRS stands by the breaks it gives you for saving for retirement.
But the calendar’s still ticking when it comes to contributing to your nest egg and locking in tax advantages for 2022. Here are some numbers to know right now regarding your retirement contribution limits.
What’s your plan?
Chances are good that no matter what kind of retirement account you have, it comes with a benefit to lower your taxes. Here are a few examples of accounts and your retirement contribution limits:
- 401(k): For 2022, you can kick in up to $20,500 and not have to pay income tax on that until you withdraw the money in retirement. You can contribute another $6,500 if you’re 50 or older. (Do you still have some to go?) This also goes for 403(b) plans or the federal government’s Thrift Savings Plan.
The contribution limits for Roth 401(k)s are the same, except that you contribute after-tax dollars and you get tax-free investment growth and tax-free withdrawals after you turn 59½, if your account is at least five years old.
- Traditional and Roth IRAs: For 2022, you can contribute a combined maximum of six grand (seven if you’re 50 or older). You often get a tax deduction for your contribution to a traditional IRA and tax-free growth and eventual withdrawals from a Roth. Your contribution limits also can’t be more than your taxable compensation for the year, and six-figure income limits might apply to a Roth. Limits don’t apply when you roll funds over from one account to another.
If you don’t have a 401(k) or similar retirement account through your job, you can also contribute to a tax-deductible traditional IRA regardless of how much you earn.
- SEP-IRA: Simplified Employee Pension IRA contributions can’t be more than the lesser of 25% of your pay or 61 grand for 2022. No age-related catch-up contributions are allowed.
There are many other flavors of retirement plans – check with us if you’ve got one of those. And as we head into 2023, remember that you’ve got until next Tax Day in April to create and contribute to some individual retirement accounts for 2022.
Bear in mind too that having retirement accounts with different tax benefits not only diversifies your nest egg but increases your withdrawals options and potential tax savings later.
Added bonus: You might also qualify for another tax break, aka the federal Saver’s Credit for making eligible contributions to a retirement account. Check with us on this.
Time on your side?
Retirement account contribution limits inch up slightly almost every year. Fueled by inflation, limits in 2023 are expected to be bigger than normal, well into the low two-digit percentages. A federal bill’s in the works to increase contribution limits even more, but it has a ways to go in Washington. Safe to say you can plan to be able to save up even more.
(Inflation’s expected to produce larger-than-average bumps in tax brackets and standard deductions for 2023, too.)
How much money?
Overall, what you should be saving in your nest egg – and what you should be thinking about for the rest of this year and into 2023?
Generally, your yearly savings go up by when you start saving and by multiples of your annual salary. For instance, if you start saving in your 30s, shoot to save three times your annual salary by the time you turn 40.
If you’re in your 40s, you may be looking at a career change or a senior position next year. Either way, your savings should outweigh your debts at this point in life. If you’re not starting to save for retirement until your 50s, you have to scrimp and work more to have saved, in total, up to six times what your annual salary is in those years.
If you’re headed into your 60s next year, you’re entering a sweet spot: You can take money out of your retirement accounts without penalty but… you don’t have to. It can continue to sit there and grow. One planning tip: Retirement account withdrawals in a year when you earn less than average can help lower your long-term taxes on retirement money.
When you top 60, your savings goal changes. Suddenly it’s not so much about growing your nest egg as it is about preserving it. Check with us on this, but think about moving your investments more toward income generation.
And don’t sweat planning. It can be fun if you map it out.
When prices are going up, the stock market is bouncing around, and you’re feeling stretched financially, navigating retirement contributions can be complex. But, it is essential.
Naturally, I’m here to help you figure out the tax liability and advantage to retirement contributions and withdrawals and can give you some insight on how you can preserve what’s already in your nest egg:
And remember, I’m here for you… all. year. long.
Your friend in the tax business,
Darryl A. Hale, EA, MBA, MST