At this time of year, it makes a ton of sense to focus on how best to maximize 401k accounts and which year-end tax considerations can be meaningful for tax year 2024. There is still plenty of time remaining in 2024 to make a difference.
Remember that Roth *401k* plans have slightly different income requirements than Roth IRA accounts:
- Roth 401k accounts have NO income limits.
- Roth IRA accounts DO have income limits.
Advice for higher earners who no longer qualify for Roth IRA accounts: make sure to utilize the Roth 401k to some extent, if your company offers a 401k plan with the Roth option. Also remember that Roth 401k contributions are made after-tax, whereas regular or traditional 401k contributions are made pre-tax.
There are those 401k savers who might ask, “Why would I forego a tax deduction and contribute to my 401k after-tax today, electing to use the Roth 401k?” Good question with a solid answer.
- Saving in a 401k account partially or entirely after-tax using the Roth 401k can especially make sense when a person is maxing out (or close to maxing out) his or her 401k contributions.*
- Regardless, over a lifetime of diligent 401k saving, total balances in 401k accounts can reach $1 million and much more.
- This means that someday at age 73 or older (which will come faster than you think) required minimum distributions, or RMDs – which are taxable income – can be over $70,000 or $80,000! This income is in addition to social security (which is mostly taxable income) and portfolio income such as dividends. Plus, any other forms of taxable income.
- The idea is to minimize taxable income in the future.
- Roth 401k monies have NO RMDs under current tax law. Whereas traditional, pre-tax 401k monies have taxable RMDs.
- Higher taxable income in retirement increases Medicare premiums – by law.
- It can make sense to attempt to “straddle” the tax structure today and contribute to a combination of traditional pre-tax 401k and Roth 401k monies, in order to create a portion of tax-free income in the future.
- Note, in certain cases of a saver having accumulated ample pre-tax 401k balances (how much is “ample”? please ask me in conjunction with your CPA) it could make sense to contribute solely to the Roth 401k.
This discussion can get “into the weeds” quickly, if not already. Please ask for input on this topic and check in with your CPA (or ask me to assist with speaking with the CPA) for all tax advice. This early September time of year is key.
*401k limits for 2024 are $23,000 for those under age 50. For age 50 and older, the additional catch-up limit is $7,500, for a total of $30,500 to the 401k. In 2024, so far, the catch-up can be either pre-tax or after-tax.
This information is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.