You are putting in the work and taking care of your present self but it’s important to also put energy toward helping your future self too. One way you can do this is by starting to save for your retirement using one of the many tools available.
The most popular way to save for retirement is through an Individual Retirement Arrangement (IRA). One of the perks of IRAs is tax benefits and the various investment options they open to help you meet your retirement goals. To prepare for a financially secure retirement, it's crucial to grasp the fundamentals well and be aware of the available options.
Traditional IRA vs Roth IRA
Before going down the road of contribution limits and how they have changed from 2023 to 2024, let’s take a quick look at the difference between Traditional IRAs and Roth IRAs.
Contributions to a Roth IRA are made with after-tax dollars, which means that you pay taxes on the money before it goes into the account. However, qualified withdrawals, including both contributions and earnings, are tax-free in retirement. Additionally, there are no mandatory distribution requirements during the original account owner's lifetime. It's important to note that Roth IRAs do not offer tax deductions on contributions, as they are made with after-tax dollars.
When you make contributions to your Traditional retirement account, you can do so with pre-tax dollars. This means that you can deduct the amount you contributed from your taxable income in the year in which you made the contribution, potentially lowering your tax bill. When you retire and make qualified withdrawals from your account, you will be taxed on the amount you withdraw as ordinary income.
Additionally, starting at age 72, with a Traditional IRA, you will be required to take mandatory minimum distributions (RMDs). This means that you must withdraw a certain amount each year, which will be subject to income tax.
2023 Contribution Limits
The contribution limits for Individual Retirement Accounts (IRAs) for the year 2023 have been set, offering individuals the opportunity to save for retirement with specific maximum amounts. Here is what you need to know:
- If you are under the age of 50, you can contribute up to $6,500. However, those aged 50 or older by the end of the year have a slightly higher limit of $7,000.
- The deadline for contributions to the 2023 tax year is April 15, 2024.
2024 Contribution Limits
For the year 2024, these limits have been adjusted to reflect changing financial landscapes and the needs of those planning for retirement. To help keep you informed, here are the updated contribution limits for both Traditional and Roth IRAs:
- The maximum contribution limit for individuals under the age of 50 has increased to $7,000, while those aged 50 or older by the end of the year can contribute up to $8,000.
- The deadline for contributions to the 2024 tax year is April 15, 2025.
As we move into 2024, it's important to stay updated on the latest changes in contribution limits to make informed decisions about saving for retirement. As with any financial planning decision, consulting with professionals such as financial advisors or tax experts is advisable to ensure compliance with regulations and optimize retirement savings strategies.
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