At this point, a lot of people are starting to work on their taxes. And you may be eager to submit your return early. The sooner you do, the sooner your tax refund can hit your bank account.
But when working on your taxes, you might calculate your refund and see that it’s lower than it’s been before. This could be due to several factors. For example, savings accounts started paying a lot more interest in 2023. If you earned more interest income, that could be reducing your refund amount.
Similarly, perhaps you took on a side job and earned more wages. Even if you paid taxes on your extra earnings along the way, you may have missed the mark, resulting in less money back from the IRS.
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Now, it’s easy to make the argument that a smaller tax refund isn’t such a bad thing. If anything, it means the IRS got to hang onto less of your money during the year. But if you’d rather avoid a reduced tax refund next year, then there’s one key step it pays to take.
Max out your retirement account — or get as close as you can
Saving money in an IRA or 401(k) could set you up with more income for your retirement. But just as importantly, funding a traditional IRA or 401(k) plan this year could shield more of your 2024 income from taxes.
There’s a limit to how much money you can put into an IRA or 401(k), and that changes from year to year. In 2024, here are the limits you need to know:
- $7,000 for an IRA if you’re under age 50
- $8,000 for an IRA if you’re 50 or older
- $23,000 for a 401(k) plan if you’re under 50
- $30,500 for a 401(k) plan if you’re 50 or older
If you have a 401(k) plan through your employer, you may be entitled to a match. The good news is that employer matching dollars don’t count toward your annual 401(k) contribution limit, since they’re not coming out of your pocket. With an IRA, there are no employer matches, so this isn’t something you’ll have to think about.
You should also know that if you put money into a Roth IRA or 401(k) this year, you’ll still enjoy some tax benefits, like tax-free investment gains and eventual tax-free withdrawals. But contributions to a Roth retirement plan will not shield your 2024 income from taxes. So keep that in mind when choosing an account.
How much more of a tax refund might you get?
The more money you’re able to put into a traditional IRA or 401(k), up to the aforementioned limits, the more money you might get back from the IRS in refund form next year. Let’s say you’re 40 and max out your IRA at $7,000 this year. If you’re in the 22% tax bracket, it means you’re saving $1,540 in taxes for 2024.
This doesn’t automatically mean your refund is guaranteed to rise by $1,540. There are so many different factors that go into calculating your final tax bill and associated refund.
But all told, funding a traditional IRA or 401(k) to the best of your ability could lead to a better refund situation next year. It’s worth examining your spending and finding ways to fund one of these accounts as generously as you can.
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