Retirement Financial Planning Archives

Maximizing Retirement Savings: Balancing a 401(k) and Traditional IRA in 2023

by Zeeshan Khaliq | Mar 29, 2024 | Retirement Financial Planning

Navigating the world of retirement accounts can be complex when maximizing your contributions across multiple plans. Employees who are lucky enough to have a 401(k) plan through their company may be wondering if they can also put money into a Traditional IRA and still get the tax benefits.

The good news is that you can, but you need to be aware of some IRS rules. For example, your modified adjusted gross income (MAGI) for 2023 will affect how much of your Traditional IRA contributions can be deducted.

Understanding Your 401(k) and Traditional IRA Options

Chart showing 401(k) and Traditional IRA contribution limits for 2023

First, let’s clarify what these accounts offer:

401(k) Plans:

These employer-sponsored retirement plans allow employees to save and invest a portion of their paycheck before taxes are paid.

In 2023, the maximum contribution limit was $22,500, and individuals aged 50 and above are eligible for an additional catch-up contribution of $7,500.

Traditional IRAs:

These are personal retirement savings accounts with tax advantages. Contributions may be tax-deductible, and the money in the account grows tax-deferred.

The contribution limit 2023 is $6,500, with an additional $1,000 catch-up contribution for those 50 and older.

The Interplay Between 401(k) and Traditional IRA Contributions

Calculator and financial documents planning for retirement savings

Contributing to a 401(k) and a Traditional IRA can maximize your retirement savings. However, if you’re covered by a workplace retirement plan like a 401(k).

In that case, the IRS sets income limits to determine whether your Traditional IRA contributions are tax-deductible.

2023 MAGI Limits for Traditional IRA Deductibility

For the tax year 2023, here’s how your ability to deduct Traditional IRA contributions is affected based on your MAGI:

Single filers or heads of household:

If your MAGI is $73,000 or less, you can fully deduct your Traditional IRA contributions. There are partial deductions that can be claimed for MAGI within the range of $73,000 to $83,000. Above $83,000, you cannot deduct your contributions.

Married filing jointly (when you’re covered by a workplace plan):

Full deduction if your MAGI is $116,000 or less. Partial deductions are allowed for MAGI between $116,000 and $136,000. No deduction is available for MAGI above $136,000.

Married filing jointly (when your spouse is covered by a workplace plan):

Full deduction if your MAGI is $218,000 or less. Partial deductions are available for MAGI between $218,000 and $228,000. Above $228,000, you cannot deduct your contributions.

Married filing separately:

If you file separately and live with your spouse at any time during the year, the phase-out range is minimal: $0 to $10,000.

Strategies for Maximizing Your Contributions

If you find that your MAGI is too high to fully take advantage of Traditional IRA deductions, don’t be discouraged.

You can still contribute to a Traditional IRA without having to worry about taxes being taken out, or you could contribute to a Roth IRA if your income is low enough.

Final Thoughts

Contributing to both a 401(k) and a Traditional IRA can significantly enhance your retirement nest egg. The 2023 MAGI limits might change how much your Traditional IRA contributions you can deduct from your taxes.

However, it is essential to remember that retirement savings is a long-term goal, and every contribution counts. Consult with a financial advisor or tax professional to tailor a retirement savings plan that best suits your needs and maximizes your tax advantages.

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This article is designed to inform readers about their options for contributing to both a 401(k) and a Traditional IRA. It focuses on the specific MAGI limits for 2023 that affect the deductibility of Traditional IRA contributions.

It aims to provide a clear understanding while encouraging readers to seek personalized advice for their unique financial situations.

The Mega Backdoor Roth Solo 401(k): Supercharge Your Retirement Wealth with Tax-Free Growth

by Zeeshan Khaliq | Jan 20, 2024 | 401K, Retirement Financial Planning, Tax Planning

As a business owner, you’re used to taking charge and seeing your company succeed. But when you’re planning for retirement, are you using all of the available strategies to make the most of your money?

The Mega Backdoor Roth Solo 401(k) is a powerful tool that can help you save a lot more for retirement while giving you the chance to watch your money grow tax-free.

Let’s look at how this plan can completely change your financial future.

How a Solo 401(k) Works: The Basics

The Solo 401(k) plan is for people who are self-employed and don’t have any employees besides their spouse. It has high contribution limits and a lot of different investment choices.

This plan can help both you as an employer and as an employee save as much as possible for retirement.

The Benefits of Roth

With a Roth Solo 401(k), you can put money in after taxes. You have to pay taxes on the money you put in at the beginning, but all of your earnings grow tax-free and are tax-free when you take the funds out of retirement account.

With traditional pre-tax accounts, withdrawals are taxed as income, so this Roth component is a big tax benefit.

The Mega Backdoor Roth Strategy Unveiled

For the Mega Backdoor Roth, you put extra money into your Solo 401(k) after taxes, up to the plan’s overall limit. This is on top of the normal employee contribution limit.

You can make a total of up to $69,000 in 2024, or $76,500 if you are 50 or older. This includes Roth employee contribution and after-tax employee contribution that is immediately converted to Roth funds.

You can immediately convert your after-tax payments to your Roth which lets your money grow tax-free. Most of the time, this conversion is tax-free because the contributions were made with money that had already been taxed.

The Roth conversion step of the after-tax funds is critical, because if it is not done, the growth of that money is taxable at the time of distribution. Please make sure to have your financial advisor convert the after-tax contribution to Roth, so your funds grow tax-free into retirement.

Putting the Strategy Into Action

In 2024, here’s how to use the Mega Backdoor Roth strategy:

Start by putting in as much as you can into your Roth Solo 401(k). For 2024, the employee contribution amount is $23,000, and if you’re 50 or older, that number goes up to $30,500.
After Tax Employee Contribution: You can still put money into your Solo 401(k) after taxes if you haven’t hit the $69,000 limit ($76,500 if you are 50 or older).
- Switch to Roth: Change these contributions that were made after taxes to Roth to start the tax-free growth.
Smart Investing: Because the Roth account will keep all future earnings tax-free, choose investments that will grow and fit your retirement plan and level of comfort with risk.

How to Get Rich Without Paying Taxes

Employing the Mega Backdoor Roth plan will help you build up a tax-free retirement fund. This is especially helpful if you think your taxes will be higher when you retire.

Conclusion

Mega Backdoor Roth Solo 401(k) is a powerful tool for business owners who want to save more for retirement. Talking to a financial advisor or tax advisor is important to make sure it fits with your general financial plan and to learn about the newest rules for retirement accounts.

Not only should you save for retirement, but you should also save wisely. With the Mega Backdoor Roth Solo 401(k), you will be doing just that.