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Strategies for Smart Saving: Lowering My Tax Liability by Investing in My Retirement

Writer's picture: Cherie SaybanCherie Sayban

Updated: Dec 11, 2024

Investing in your retirement is not only a smart way to secure your future, but it can also help you lower your current tax liability. 


Retirement

I am a Certified Public Accountant with over 25 years of experience, highlighting the importance of understanding how retirement planning can be used as a tax-saving strategy. Here are some key insights on how you can leverage retirement investments to reduce your tax burden.


Understanding Tax-Advantaged Retirement Accounts


The first step in lowering your tax liability through retirement investing is understanding the types of accounts available. These accounts generally fall into two categories: tax-deferred and tax-free. The two most common tax-advantaged retirement accounts in the United States are the Traditional Individual Retirement Account (IRA) and the 401(k).


  • Tax-Deferred Accounts: These accounts allow you to defer taxes on your contributions and investment gains until you withdraw them during retirement. Examples include Traditional Individual Retirement Accounts (IRAs) and 401(k)s.

    • Traditional IRA: Contributions to a Traditional IRA may be tax-deductible, depending on your income and whether you're covered by an employer-sponsored retirement plan. By contributing to a Traditional IRA, you lower your taxable income, potentially reducing your tax liability. However, withdrawals from Traditional IRAs are taxed as ordinary income during retirement.

    • 401(k): This is an employer-sponsored retirement plan that also allows pre-tax contributions. By contributing to a 401(k), you reduce your taxable income, lowering your overall tax burden. Like Traditional IRAs, withdrawals from a 401(k) are taxed at retirement.

  • Tax-Free Accounts: Contributions to these accounts are made with after-tax dollars, meaning you don't get an immediate tax break. However, withdrawals during retirement are generally tax-free, including any gains from investments.

    • Roth IRA: With a Roth IRA, you won't reduce your taxable income at the time of contribution. However, since you've already paid taxes on these contributions, your withdrawals during retirement are tax-free, provided you meet certain conditions (such as holding the account for at least five years and being over 59½ years old).


Roth IRA

Maximizing Your Contributions


Contributing the maximum allowed by law to your retirement accounts can have a significant impact on your tax liability. For 2024, the IRS has set the following contribution limits:


  • 401(k): The maximum contribution limit is $22,500. If you're aged 50 or older, you can make an additional catch-up contribution of $7,500, bringing the total possible contribution to $30,000.


  • Traditional IRA: The contribution limit is $7,000, with a $1,000 catch-up contribution for those over 50.


By maximizing your contributions, you can lower your taxable income significantly. For example, if you're under 50 and contribute the maximum amount to both a 401(k) and a Traditional IRA, you could reduce your taxable income by up to $29,500.


401K

Utilizing Employer Matching Contributions


Many employers offer matching contributions to 401(k) accounts, which is essentially free money. By taking full advantage of your employer's matching program, you increase your retirement savings without increasing your own financial burden. These contributions are also tax-deferred, contributing to lower tax liability.


Considering a Roth IRA or Roth 401(k)


While Traditional IRAs and 401(k)s offer tax-deferred benefits, Roth accounts provide a different approach. Contributions to a Roth IRA or Roth 401(k) are made with after-tax dollars, meaning they don't reduce your current tax liability. However, withdrawals in retirement are generally tax-free.


This can be a strategic choice for those who expect to be in a higher tax bracket in retirement or who value the flexibility of tax-free withdrawals. Investing in a Roth account can also diversify your retirement tax strategy.


Roth Account

The Impact on Your Tax Liability


Investing in retirement accounts can significantly impact your current tax liability. By reducing your taxable income through contributions to Traditional IRAs and 401(k)s, you may be able to lower your tax bracket, which can lead to substantial tax savings. Additionally, these contributions grow tax-deferred, meaning you won't owe taxes on gains until you withdraw them.



Working with a CPA for Personalized Advice


While these general strategies can be helpful, it's important to remember that tax planning is complex and varies based on individual circumstances. Working with a CPA like me, Cherie Sayban, can help you navigate the specifics of your financial situation, ensuring you're taking advantage of all available tax-saving opportunities. A CPA can also help you plan for long-term retirement goals while minimizing your tax liability today.


Accountant

Investing in your retirement not only sets you up for a more secure future but also provides immediate tax benefits. By understanding your options and working with a knowledgeable CPA, you can make informed decisions that lead to significant tax savings while building a solid foundation for your retirement.



About the Author


Cherie Sayban, Certified Public Accountant in Atlanta

Cherie Sayban is a certified public accountant. She has over 25+ years of experience in Finance, Accounting and Bookkeeping.  


Cherie Sayban CPA provides various financial and accounting solutions to small and mid-size businesses. Our portfolio includes: tax preparation, payroll preparation, accounts receivable and payables, general ledger, and QuickBooks . Our bookkeeping workshops are offered both in-person and virtually.


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To learn more about Cherie Sayban CPA's website finance services, how we can help grow your business through social media or even strategize with you on some ideas to better manage your businesses finances. Visit us at www.CherieSaybanCPA.com


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