The IRS has recently introduced a new set of rules for 2024, allowing individuals to contribute more towards their 401(k) plans. Additionally, catch-up contributions are also being marginally adjusted.
“Tax-favored retirement portfolios are a game changer for investors, offering a smoother pathway towards wealth accumulation, minus the usual tax interference in standard brokerage accounts. It’s comparable to a race in athletics,” explains Jonathan Lee, a U.S. Bank Wealth Management senior portfolio manager. “Imagine your contribution as the sprinter and taxes on capital gains and dividends as hurdles obstructing your path to victory – reaching your retirement savings goal on time. Tax-favored accounts effectively remove these obstacles from your retirement savings journey.”
Lee further elaborates that individuals aged 50 and above gain additional benefits as they can contribute more towards their tax-favored accounts as retirement nears.
He illustrates the advantage of the “catch-up” benefit for an IRA, indicating that an extra $1,000 annually, growing at an assumed 7% rate year-on-year, can result in substantial increases in retirement savings over different time spans.
Retirement accounts tied to the S&P 500 could yield more returns as the broadest measure of the stock market has generated an average 10% return annually.
“Many in this age group have already met their other financial objectives, such as funding their children’s college education or paying off their mortgages,” says Lee. “This allows them to redirect an additional $1,000 of their savings towards a catch-up contribution to their IRA.”
He further emphasizes that these pre-tax contributions to your workplace savings plan or tax-deductible additions to an IRA can reduce taxable income. “The more you contribute, the lower your tax bill might be for the year the contributions are made,” he adds.
Lee also highlights an IRS provision allowing a non-working spouse to contribute to an individual retirement account, given that they file a joint tax return with their spouse. This account, referred to as the “Spousal IRA,” is subject to the same annual contribution limits as any other IRA. This means that non-working spouses will also be able to save more in 2024.
Emily Irwin, senior director of advice and planning for Wells Fargo, points out that people in their 50s typically continue working for another seven to 15 years, often during their highest earning years. “By maximizing catch-up contributions, individuals can leverage compound interest to their advantage, potentially doubling or even tripling their investment,” she explains.