How to slash your tax bill in 2024: Learn how to potentially save $8,850 this year in taxes!

In 2024, you can significantly reduce your tax bill by contributing to retirement accounts like 401(k)s, IRAs, or SIMPLE IRAs. These contributions lower your taxable income, offering substantial tax savings.One of the smartest financial moves you can make is contributing to a retirement account. Not only  are you saving for your future, but you’re also reducing your taxable income today. Whether you're  contributing to a 401(k), 403(b), IRA, or SIMPLE IRA, the tax benefits can be substantial. In this  article, we’ll explore how contributing to these accounts can save you money on taxes, using real world examples and current tax brackets. 

Understanding Tax Brackets and Retirement Contributions 

To grasp how retirement contributions save you money on taxes, it’s crucial to understand how tax  brackets work. The U.S. tax system is progressive, meaning that your income is taxed at different  rates as it increases. For 2024, some of the most common federal tax brackets are: 

• 12%: Income from $11,000 to $44,725 (single) or $22,000 to $89,450 (married filing jointly) • 22%: Income from $44,726 to $95,375 (single) or $89,451 to $190,750 (married filing jointly) 

• 24%: Income from $95,376 to $182,100 (single) or $190,751 to $364,200 (married filing  jointly) 

In the examples below, we’ll focus on the 22% tax bracket. 

Example 1: Maxing Out a 401(k) or 403(b) Plan 

The 401(k) and 403(b) plans are two of the most common retirement savings options, typically  offered by employers. For 2024, the maximum contribution limit for these plans is $23,000 for  individuals under 50, and $30,500 for those 50 and older (which includes a $7,500 catch-up  contribution). 

Scenario: Contributing $23,000 to a 401(k) 

Imagine you’re a single filer earning $80,000 a year and you’re in the 22% tax bracket. Without  contributing to your 401(k), your taxable income would be $80,000. 

• Contribution: $23,000 

• New Taxable Income: $80,000 - $23,000 = $57,000 

• Tax Savings: $23,000 x 22% = $5,060 

By maxing out your 401(k) with a $23,000 contribution, you reduce your taxable income to $57,000,  saving $5,060 in federal taxes. 

Scenario: Contributing $30,500 to a 401(k) (Age 50+) 

If you’re 50 or older and make the full $30,500 contribution: 

• Contribution: $30,500

• New Taxable Income: $80,000 - $30,500 = $49,500 

• Tax Savings: $30,500 x 22% = $6,710 

In this scenario, you save $6,710 in federal taxes. 

Example 2: Contributing to an IRA 

Individual Retirement Accounts (IRAs) are another common retirement savings option. The  contribution limit for 2024 is $7,000 if you’re under 50, and $8,500 if you’re 50 or older (including a  $1,500 catch-up contribution). Contributions to a traditional IRA are tax-deductible if you meet  income eligibility requirements. 

Scenario: Contributing $7,000 to an IRA 

Let’s say you’re still in the 22% tax bracket, earning $80,000 a year, and you decide to contribute  $7,000 to a traditional IRA. 

• Contribution: $7,000 

• New Taxable Income: $80,000 - $7,000 = $73,000 

• Tax Savings: $7,000 x 22% = $1,540 

By contributing $7,000 to a traditional IRA, you reduce your taxable income to $73,000, saving  $1,540 in federal taxes. 

Example 3: Maxing Out a SIMPLE IRA 

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is typically offered by small businesses.  For 2024, the contribution limit is $17,000 for individuals under 50, and $20,500 for those 50 and  older (including a $3,500 catch-up contribution). 

Scenario: Contributing $17,000 to a SIMPLE IRA 

If you’re earning $80,000 a year in the 22% tax bracket and contribute $17,000 to a SIMPLE IRA: • Contribution: $17,000 

• New Taxable Income: $80,000 - $17,000 = $63,000 

• Tax Savings: $17,000 x 22% = $3,740 

In this case, maxing out your SIMPLE IRA reduces your taxable income to $63,000 and saves you  $3,740 in federal taxes. 

Summary of Tax Savings 

Here’s a summary of how much you can save on taxes by maxing out different retirement accounts:

How to Adjust Contributions to Max Out by Year-End 

Maxing out your retirement contributions can be challenging, especially if you’re trying to catch up  before the end of the year. Here’s how you can calculate the necessary contributions to hit your  target. 

Step 1: Determine the Remaining Contribution Amount 

First, figure out how much you’ve already contributed for the year and subtract that from the annual  contribution limit. 

For example, if you’ve contributed $10,000 to your 401(k) and want to max out at $23,000: • Remaining Contribution: $23,000 - $10,000 = $13,000 

Step 2: Calculate the Remaining Pay Periods 

Next, calculate the number of pay periods left in the year. If it’s September and you’re paid  biweekly, there are about 8 pay periods left. 

Step 3: Adjust Your Contribution Amount 

Now, divide the remaining contribution amount by the number of pay periods left. • Per-Pay-Period Contribution: $13,000 ÷ 8 = $1,625 

To max out your 401(k) by the end of the year, you would need to contribute $1,625 from each  paycheck. 

Involving a financial advisor 

Reaching out to a financial advisor can be invaluable when deciding which retirement account to  max out first. Advisors can analyze your specific financial situation, considering factors like your  current income, future tax expectations, and employer contributions. They can guide you in  prioritizing contributions, such as maxing out a 401(k) to take full advantage of any employer match  before contributing to an IRA. Beyond optimizing your retirement savings, a financial advisor can  help you develop a comprehensive financial plan, ensuring you’re on track to meet your long-term  goals, navigate tax strategies effectively, and make informed investment decisions.

Conclusion 

Contributing to retirement accounts like a 401(k), 403(b), IRA, or SIMPLE IRA can significantly  reduce your taxable income while helping you build a secure financial future. The tax savings can be  substantial, especially when you maximize your contributions. By carefully calculating your  remaining contributions and adjusting your savings strategy as needed, you can make the most of  these tax-advantaged accounts. 

If you’re unsure how to maximize your retirement contributions or need help planning your financial  future, consider working with a financial advisor. They can guide you through the process, ensuring  you’re taking full advantage of the tax benefits available and setting yourself up for a comfortable  retirement. 

Intermountain Wealth Management is a Registered Investment Adviser (RIA). The company manages several fee-based  portfolios comprised of various equity and fixed-income investments that may include mutual funds and exchange traded  funds. This is not a prospectus or an offer to sell any security. Please read the prospectus of any investment before you  invest. Information included here is intended for education and information purposes only. 

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