Maximize IRA / 401K Contributions

It’s tax season…meaning it’s a good time to understand your financial situation, and that includes your retirement account.

Maximizing your IRA or 401K contributions might initially appear counterintuitive—after all, it means diverting funds from your immediate savings. However, the long-term benefits far outweigh the short-term sacrifice. By contributing to your retirement accounts, you’re essentially investing in your future financial security. With the power of compounding interest and potential employer matches, your contributions have the potential to grow substantially over time. Moreover, contributing to these accounts often comes with tax benefits, allowing you to save money in the long run. So, while it may seem daunting to part with your savings now, prioritizing your retirement accounts can lead to significant financial gains and peace of mind down the road.

Here is an example of tax benefits to contributing to your IRA account.

Without any contributions to your IRA, your taxable income would be $100,000. Here’s how the taxes might look:

• Income: $100,000
• Taxes (22%): $22,000

Your take-home pay would be $100,000 – $22,000 = $78,000.

Now, let’s explore the impact of contributing to an IRA. Suppose you contribute $8,000 annually to your IRA (50 or older).

• Income (after IRA contribution): $100,000 – $8,000 = $92,000
• Taxes (22%): $20,240

Your take-home pay would be $92,000 – $20,240 = $71,760.

By contributing $8,000 to your IRA, you reduce your taxable income to $92,000, thereby lowering your tax liability to $20,240. Consequently, your take-home pay increases to $71,760 compared to $78,000 without any IRA contributions. This demonstrates how contributing to your IRA can effectively reduce your tax burden and increase your disposable income, aiding in your long-term financial goals.

-HC