Editor’s note: The September-October issue of Seattle magazine, which is out the second week of September, focuses on finding meaning in aging. You can subscribe here.

 

With pensions disappearing and Social Security precarious, saving for your own retirement is more crucial now than ever. Here are some considerations to set you up for retirement success.

The basics: Maximize your 401(k) contributions.

If your employer offers a 401(k), you can contribute up to $23,000 of your earned income in 2024. With long- and short-term tax benefits, no income restrictions on who can contribute, and automatic payroll deductions, contributing the maximum to your 401(k) is truly “Retirement 101.”

 

Should I contribute to a traditional 401(k), a Roth 401(k), or both?

You contribute to a traditional 401(k) with pre-tax dollars, so you’ll reduce your taxable income now, but you are taxed when you take money out. A Roth 401(k) is funded with post-tax dollars, so there is no immediate tax benefit, but distributions are tax-free after age 59½. Some prefer to contribute to both types to provide a combination of tax-free and taxable income in retirement. If you prefer the full tax benefit now, a Traditional 401(k) may be the way to go, but if you think you’ll be in a higher tax bracket after you retire, the Roth 401(k) may be more beneficial. A Roth has the added advantage of earnings never being taxed if removed after retirement age, one of the only ways to (legally!) earn tax-free money.

 

No-brainer: Employer 401(k) matching:

If you are lucky enough to work somewhere with 401(k) matching, contributing enough to get the full match is one of the least painful ways to save for retirement.

 

Self-employed? Side gig? Start your own plan.

If you have taxable self-employment income, you are likely eligible to start a self-employed retirement plan, with potentially even higher contribution limits than an employer plan. Consulting on the side? Uber driver on the weekends? Even those with a side gig can set up a self-employed retirement plan.

 

 Make too much to contribute to a Roth IRA? Try the back door.

If your income is too high to contribute directly to a Roth IRA, you may be able to contribute to a traditional IRA and then move the funds to a Roth, bypassing the Roth income restriction. There may be taxes paid in the short term, but given the long-term power of a Roth, this could be worth it. A backdoor Roth is a more advanced tax strategy with strict guidelines, so talk to your brokerage and tax professional before undertaking.

 

Family tax planning: IRA for kids:

If your teen works a summer or weekend job, they may be eligible to contribute to an IRA, which in Washington is a custodial account under your control until they turn 21. Imagine the size of your IRA had you started it back when you were slinging lattes in high school! If your teen is less than excited about contributing their hard-earned dollars to retirement, consider reimbursing them yourself for their contributions. This can also be a great tool in your legacy-planning, as the more retirement savings your adult child has, the less you need to worry about what you will leave them when you are gone.

 

Be cautious with a cash-out:

When a large expense unexpectedly arises, it is tempting to dip into retirement savings, but removing funds early can carry hefty penalties. It may also mean you suddenly owe the deferred tax on any pre-tax contributions. Plus, removing money early means you lose the potential growth that comes from investing the funds. Weigh the pros and cons carefully when considering an early distribution.

 

No IRA contributions by Dec. 31? No problem.

Many don’t realize you can contribute to an IRA for the previous calendar year up until the tax filing deadline. So, if it slipped your mind to contribute by Dec. 31, 2024, you still have until April 15, 2025, to make a 2024 contribution. If you do contribute between January and April for the previous calendar year, make sure your servicer understands which calendar year to earmark the funds for.

 

Health Savings Account (HSA): Retirement savings in disguise:

If you have a high deductible health plan, you may be eligible to contribute to an HSA. Contributions reduce your taxable income now, and then can then be invested and grow tax-free. Withdrawals for qualified health expenses are not taxed. With the potential for tax-free growth, an HSA is an obvious strong choice for planning for retirement health care costs. What’s more, after you turn 65, you can use the funds for anything, without penalty, though non-medical withdrawals will be subject to tax. An HSA therefore functions similarly to a traditional IRA, and is a great retirement supplement, especially if you already max out your IRA and 401(k) contributions.

 

Go hard after 50:

Contribution limits on many plans increase as you get older. At age 50, the 401(k) contribution limit jumps by $7,500 and the IRA limit by $1,000. At age 55, you can contribute an extra $1,000 to an HSA. Further, there is no longer an age limit for Roth IRA contributions, and that’s good news to people who work into their 70s and beyond.

 

Don’t contribute more than you are allowed.

Pay attention to contribution and income limits, because over-contributing can carry penalties. If you did over-contribute for the year, do not despair, as excess contributions can generally be removed without consequence prior to the filing deadline, and if it’s too late for that, talk to your tax professional about the least painful remedy.

 

Lower income? Saver’s Credit to the rescue:

Low- and moderate-income taxpayers who contribute to certain retirement plans may be eligible for a tax credit of up to $2,000. Even if you think you cannot possibly afford to contribute to retirement, the Saver’s Credit may allow you to save without any reduction to your cash on hand.

 

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Raymond Lyle is the owner of Raymond Lyle CPA PLLC in Seattle. More information is at raymondlylecpa.com. The above is not intended as legal or tax advice.