The end of the year is a good occasion for financial planning, because it gives you a chance to step back and take a big picture view of your money and your life. Many people want to save more money and invest more for retirement, but struggle to make it happen during the everyday rush of paying bills. Use this quiet time at the end of the year to put yourself in a better position for financial success.
There is one simple money move you can make by the end of the year that will accomplish three financial goals.
- Get a tax break for 2023
- Save more money in 2024
- Help you build better financial security for many years to come
This strategy is available to almost everyone — it’s opening a traditional IRA.
Let’s look at a few reasons why putting money into an IRA is the single best strategy you can choose for your financial success.
1. Opening an IRA can give you a tax break right now
For 2023, you can put up to $6,500 into a traditional IRA (with an extra $1,000 catch-up contribution if you are age 50 or older). The amount of tax deductions you can get from your IRA depends on whether you or your spouse already have a tax-advantaged retirement plan at work and how much money you make. But unless you have a high income or an unusual tax-filing status, you should be able to get a tax deduction for that entire amount.
For example, you can deduct the full amount of your traditional IRA contribution if you are not covered by a retirement plan at work, and:
- You are single
- You’re married filing jointly and and your spouse also is not covered by a work retirement plan
- You’re married filing jointly, your spouse is covered by a work retirement plan, and your modified adjusted gross income (AGI) is $218,000 or less
2. Opening an IRA helps you save more in 2024
Can’t afford to put more money into retirement savings for 2023? No problem. Even if you don’t have extra cash sitting around, opening an IRA can be a good move to start the new year. The IRA contribution limits for 2024 will be $7,000 (or $8,000 for people age 50 and over).
Having that IRA account as another option for retirement savings can help motivate you to keep investing every month.
3. Opening an IRA can boost your retirement savings beyond your 401(k)
Even if you already have a 401(k) or other employer-sponsored retirement plan, you can still use a traditional IRA to get an extra tax break. But make sure you fall within the IRS income limits.
For example, if you are covered by a retirement plan at work, you can get a tax deduction for all the money you put into your traditional IRA, up to the full amount of the contribution limit ($6,500 or $7,500) if:
- You are single with modified AGI of $73,000 or less
- You are married filing jointly with modified AGI of $116,000 or less
Putting extra money into an IRA can be a good strategy, especially if you are a high earner who is already maxing out your 401(k). For example, let’s say that you’re a single person, age 45, with a salary of $100,000, and you max out your 401(k) by putting in $22,500 for 2023. You can put another $6,500 into a traditional IRA to reduce your modified AGI and get an extra tax break.
Here’s how the math looks:
| Salary: | $100,000 |
|---|---|
| (minus) 401(k) maximum contribution | $22,500 |
| (minus) Traditional IRA contributions | $6,500 |
| Adjusted gross income equals: | $71,000 |
Data source: Author’s calculations.
This amount of adjusted gross income is below the $73,000 limit for a single person to get a tax deduction for the full amount of IRA contributions. If you’re an aggressive saver who wants to sock away the maximum amount of money for retirement, opening an IRA in addition to your 401(k) or other work retirement plan can be a great strategy. And it’s not too late to cut your tax bill for 2023! You can make prior-year contributions to a traditional IRA for 2023 until April 15, 2024 (Tax Day).
Bottom line: Opening a traditional IRA (or putting more money into your IRA if you have one already) can be a great strategy for year-end financial planning. It can help you get extra tax deductions for 2023, save and invest more money for retirement in 2024, and boost your long-term financial security. This might just be the single best end-of-year strategy to maximize your money.
