The Best Money Move to Make Before Tax Season Hits
Ah, tax season. The time of year that brings both dread and anticipation. Dread, because paperwork can be overwhelming, and anticipation, because of the potential that a well-organized financial strategy might lead to a rewarding refund. But fear not, dear reader, for today we delve into what I consider the single smartest financial move to make before tax season hits. It’s essentially the linchpin that can transform your tax chaos into tax triumph. Spoiler alert: it's all about getting a head start on contributions to your IRA or employer-sponsored retirement plan.
In an era where our lives feel like software—constantly running, always updating—the notion of setting your tax season game plan to optimize efficiency and output is one that fits seamlessly with our ethos at Prime to You. It feels like having your life on autopilot, fine-tuning in the background so you can live smarter, with more ease.
1. Why Retirement Contributions?
Why focus on retirement contributions as a pre-tax season move? It’s simple yet profound: maximizing your contributions not only secures your financial future but also offers immediate tax benefits. Contributions to traditional IRAs and 401(k) plans are typically tax-deductible, reducing your taxable income for the year. Imagine beefing up your nest egg while simultaneously lightening that tax burden—it’s a win-win.
The Tax Implication
By increasing your retirement contributions before the year ends, you set yourself up for a better position. The IRS allows you to deduct contributions on your tax return, lowering the income that’s subject to taxes. It's like hiding money from the taxman—ethically, of course!
2. How to Evaluate Your Financial Situation
Before you go all in, it’s crucial to take a snapshot of your current financial landscape. It's akin to opening a dozen tabs on your computer—sometimes overwhelming, but necessary to get the bigger picture.
Budget Analysis
Dive into your budget and expenses. Utilize a simple spreadsheet or a budgeting app to get an overview of your income, expenses, and savings. Knowing where your money comes from and where it goes is key to understanding how much you can redirect towards retirement contributions.
Assess Current Contributions
Check your current contribution levels. Are you maximizing your employer match? Failing to do so is like leaving free money on the table. During my early working years, I naively contributed the minimum, losing out on what could have been years of compounded growth—all because I didn't understand the importance of taking full advantage of employer matching.
3. Adjust Your Mindset: Saving as a Lifestyle
Thinking of financial contributions as a living, breathing aspect of your lifestyle creates a seamless integration with your financial goals—no longer a chore but a habit, a routine. Much like a software update, it’s about building a sustainable feature that supports your future self.
Building the Habit
Start with small steps. Increase contributions gradually if you're currently unable to reach the maximum limit. When I first started, it seemed impossible to reach the IRS limits for retirement accounts, yet by increasing contributions by just 1% every year, it became a manageable feat.
Automate to Maximize
Set it, forget it, and watch your balance grow. Automating contributions eases the mental load, ensuring you pay yourself first. It’s akin to setting recurring calendar events; a process that ensures your financial health remains top of mind, with little effort.
4. Common FAQs About Pre-Tax Season Moves
Let’s address some common questions that often leave folks puzzled as they approach tax season:
How Much Can I Contribute?
For 2023, you can contribute up to $6,500 to an IRA, or $7,500 if you’re 50 or older. For 401(k) plans, the limit is $22,500, plus an additional $7,500 as catch-up contributions if you’re 50 or older.
What If I Miss the Tax Year Deadline?
Don’t stress. You can still make contributions to your IRA until the tax filing deadline, usually April 15th of the following year. However, for employer plans like 401(k)s, contributions need to be made by December 31st of the tax year.
How Do Contributions Affect My Tax Return?
Contributing to traditional retirement accounts can lower your AGI (Adjusted Gross Income), potentially placing you in a lower tax bracket and maximizing other tax benefits or credits.
5. Steps to Implement the Strategy
You’re convinced and ready to dive in. Follow these streamlined steps to initiate your strategic pre-tax season money move:
Step 1: Review Your Portfolio
Start with a thorough review of your existing retirement accounts and current contributions. Make adjustments to align with your financial goals.
Step 2: Explore Employer Benefits
Evaluate if your employer offers a 401(k) or similar plan with matching contributions. Aim to contribute at least enough to receive the full match.
Step 3: Adjust Contributions
Increase your contributions via your paycheck or directly through your retirement account provider. Many platforms allow you to manage this through an online dashboard.
Step 4: Automate
Set up automatic contributions to align with your paycheck schedule. This ensures consistency and aids in maintaining the strategy with minimal manual intervention.
Step 5: Monitor and Adjust
Regularly check your progress. Make adjustments as needed to stay on track with your goals. This is a dynamic process, just like life’s software—subject to updates and improvements.
Prime Inputs!
Employer Match Maximization: Prioritize reaching the full employer match for your 401(k) to ensure you're not leaving money on the table.
IRA Contributions: Consider opening an IRA to complement your employer plan—diversifying your retirement savings strategy.
Set Incremental Increases: Commit to increasing contributions by 1-2% annually to gradually reach contribution limits without impacting your budget significantly.
Automatic Adjustments: Use automation to adjust contributions annually, aligning with raises or bonuses.
Regular Check-ins: Schedule bi-annual reviews of your contributions and goals to ensure alignment with your broader financial plan.
Conclusion
Navigating tax season doesn’t have to be a dreaded chore. By focusing on maximizing retirement contributions, you’re not only investing in your future but also leveraging tax benefits that matter today. Think of it as installing a powerful upgrade to your financial software—a system that runs smoothly in the background, enhancing your peace of mind.
At Prime to You, we’re all about simplifying and optimizing the aspects of life that matter, so you can focus on living—smart, streamlined, and stress-free. Equip yourself with the right strategies, and watch as tax season transforms from a daunting deadline into a savvy strategic opportunity.
