Looking Forward: Older Americans Receive These Tax Advantages
As you near retirement, specific tax benefits become increasingly advantageous—particularly for those who want to preserve their retirement savings. For taxpayers 50 and over, you could be eligible for extra tax breaks that can help contribute toward your retirement savings and maximize your income. The following tips can help you better prepare for your financial future as you enter your golden years.
Contribute more to your IRA.
Maxing out your IRA can boost your retirement savings while lowering your yearly taxable income. The 2024 IRA contribution limit for those under 50 is $7,000. Beginning at age 50, however, you can contribute an additional $1,000 toward your IRA for a total of $8,000.
Save with catch-up contributions.
General retirement plan contribution limits are increased to $23,000 for 2024. If you're 50 or older and participate in a 401(k) or other employer-sponsored plan, you can take advantage of a catch-up contribution and compensate for potentially missed savings opportunities during your career.
The catch-up contribution for 2024 is $7,500 for 401(k), 403(b), and other plans, which results in a total yearly contribution of up to $30,500. Employees aged 50 or older who participate in SIMPLE plans can contribute an additional $3,500.
No withdrawal penalty
Though there are exceptions to penalties from taking early withdrawals from your 401(k), tapping into funds from your retirement accounts before age 59 ½ results in a 10% penalty fee in addition to ordinary income tax.
Once you reach age 59 ½, you can withdraw funds from your retirement accounts for any reason without incurring a penalty tax.
Benefit with your Health Savings Account
A health savings account (HSA) offers many retirement and tax benefits. Those who have an HSA can contribute up to $4,150 per year. If you’re 55 or older, you can contribute an extra $1,000 for a total of $5,150.
Withdrawals from an HSA for medical care are tax-free for anyone, though you can use the funds for other purposes. If you do this, be aware that you’ll face a penalty tax as well as ordinary income tax. Once you reach age 65, you won’t have to pay a penalty tax, but you will be taxed on ordinary income. And once you enroll in Medicare, you can no longer contribute to your HSA.
Claim a larger standard deduction.
If you’re 65 or older, not only is your filing threshold higher than that of someone younger, but you’re also eligible to claim a larger standard deduction.
The amount of this additional deduction - on top of the existing standard deduction - varies by filing and marital status: for singles, that amount is $1,950. If married filing separately, the amount is $1,550 for the spouse who is 65 or older and $3,100 for married couples filing jointly. If one or both spouses are 65 or older and blind, you may also qualify for a higher standard deduction.
Use Qualified Charitable Distributions (QCD)
As of 2024, traditional IRA and other retirement plan account holders 73 years of age must begin taking a Required Minimum Distribution (RMD). These distributions are taxed at ordinary income rates. However, you may want to consider using a QCD strategy and donate your RMD to a qualified 501(c)(3) charitable organization.
Work with Chatterton to discover your tax benefits as you enter retirement!
If you’re nearing retirement age or newly retired, you may qualify for additional tax benefits to boost your retirement savings and make them last. As you begin to transition into retirement, it’s understandable to have questions about the tax advantages you’re eligible for and how to apply them to your lifestyle.
The tax professionals at Chatterton and Associates can help you determine which tax benefits would be most beneficial to your personal financial situation. Contact us today to help you make informed decisions about your retirement and tax planning needs.
Sincerely,
The Team at Chatterton & Associates
