What is the best tax strategy for maxing out retirement plan contributions?

Here’s what HIVE AI had to say about “What is the best tax strategy for maxing out retirement plan contributions?”:

Strategy to Max Out Retirement Contributions (and Optimize Taxes)

Prioritize your workplace plan deferrals

• Contribute up to the annual elective deferral limit to your 401(k) or 403(b) and use age-50 catch-up if eligible. For reference, the IRS shows 2024 limits of $23,000 (401(k)/403(b)) and $16,000 (SIMPLE), with catch-up limits of $7,500 (401(k)/403(b)) and $3,500 (SIMPLE). Check your plan’s 2025 limits and allow the payroll system to auto-increase to hit year-end targets. 1
• If you have multiple workplace plans in the same year (e.g., changed jobs), coordinate so your combined 401(k)/403(b) elective deferrals don’t exceed the annual 402(g) limit; if you do, request a corrective distribution of the excess by April 15 of the following year to avoid double taxation. When deciding which plan to pull from, consider where you get the best match, better investments, and lower fees. 2

Get the full employer match first

• Always contribute at least enough to capture the full employer match; it’s an immediate, risk-free return. If you must choose among plans, prioritize the one with the richest match or lowest expense ratios, then allocate remaining deferrals to other plans. 2

Choose pre-tax vs Roth strategically

• Pre-tax deferrals reduce current taxable wages reported in Box 1 of your W‑2 but are still subject to Social Security and Medicare (Boxes 3 and 5). Roth deferrals don’t reduce current taxable wages. Either way, deferrals are reflected in Box 12 with plan-specific codes. Consider current vs future tax rates (and state taxes) when deciding pre-tax vs Roth. 3

Add IRAs on top of your workplace plan

• You can contribute to a traditional or Roth IRA in addition to workplace plans (subject to IRA income limits for deductibility/eligibility). For 2024, the IRA combined contribution limit is $7,000 ($8,000 if age 50+); confirm the current-year limit and eligibility. 4

Capture the Saver’s Credit if eligible

• If your income is within limits, claim the Saver’s Credit (Form 8880) on contributions to workplace plans or IRAs. The credit ranges from 10% to 50% of contributions based on filing status and AGI; dependents and full-time students aren’t eligible. Note that certain recent distributions reduce the amount of contributions eligible for the credit. 5
• Practical tip: non-rolled distributions from IRAs or plans in the lookback period reduce the contributions eligible for the credit; after these reductions, the maximum annual contribution eligible per person is $2,000. 6

If you’re self-employed: use a Solo 401(k), SEP, or SIMPLE

Solo 401(k) or SEP optimization

• For self-employed individuals, calculate your plan contribution off net earnings from self-employment after the 1/2 SE tax deduction. The IRS provides a step-through example showing how to back into the allowable contribution. This helps verify your calculation against the plan’s percentage limit. 7
• SEP-IRAs allow deductible employer contributions up to the lesser of 25% of compensation or the annual dollar cap ($69,000 for 2024). Validate you’re under the 25%/dollar limit and correct any overage through the SEP Fix‑It Guide. 8
• Contributions you make by your tax return due date (with extensions), to a plan established by year-end, can be designated for the prior year if the plan treats them as received on the last day of that year. This can help fill a prior-year gap while filing. 9

SIMPLE plan considerations

• SIMPLE deferral limits are lower than 401(k)s (see reference limits), but plans are easy to administer and include employer contributions. Make sure catch-up contributions are enabled if you’re 50+. 1

Special case: Governmental 457(b) plans

• Governmental 457(b) plans have their own elective deferral limits separate from 401(k)/403(b). They also feature a special “last 3 years before normal retirement age” catch-up, potentially allowing up to 2× the basic limit if you have unused deferrals from prior years (distinct from age‑50 catch-up). 10

Avoid and fix excess contributions

• If your combined deferrals across plans exceed the limit, contact a plan to distribute the excess (and related earnings) by April 15 of the following year. Factor in where you get the best match, fees, and investment lineup when choosing which plan issues the correction. 2
• For qualified plans, excesses for highly compensated employees are handled under the 401(k) ADP corrections framework—be alert to “excess contributions” and the method of distribution under the plan’s nondiscrimination rules. 11
• For IRAs, excess contributions trigger a 6% excise tax each year they remain; timely corrective distributions avoid ongoing penalties. 12

Tax reporting and payroll mechanics

• Know how contributions are reported on your W‑2: pre-tax salary deferrals reduce Box 1 wages (income tax) but are still in Social Security/Medicare wages (Boxes 3/5). Roth deferrals don’t reduce Box 1. Your elective deferrals and Roth amounts appear in Box 12 with the appropriate codes; the “retirement plan” box is checked if you were an active participant. 3

Practical order of operations

• Max the match in your best 401(k)/403(b)
• Fill the rest of your elective deferral limit (pre-tax or Roth) in that plan
• If eligible, claim the Saver’s Credit with Form 8880
• Add IRA contributions (traditional or Roth) if eligible and beneficial
• If self-employed, layer Solo 401(k) or SEP contributions to reach the highest combined shelter
• Use 457(b) if available for additional deferrals separate from 401(k)/403(b)
• Monitor total deferrals across jobs/plans; fix any excess by April 15

Advanced timing tactics

• If you’re self-employed and behind for last year, establish the plan by year-end (where required) and make deductible employer contributions by the return due date (with extensions) while designating them for the prior year per plan rules. 9

When in doubt, model both cash-flow and tax impact

• Compare pre-tax vs Roth savings rates (after employer match and payroll withholding) and run a paycheck and year-end tax projection. Remember, pre-tax deferrals lower current taxable income; Roth deferrals don’t, but qualified withdrawals are tax-free. 3

Sources

1 – IRS.gov – Maximize your salary deferrals 📄 Summarize
2 – IRS.gov – How much salary can you defer if you’re eligible for more than one retirement plan? 📄 Summarize
3 – IRS.gov – Retirement plan FAQs regarding contributions – Are retirement plan contributions subject to withholding for FICA, Medicare or federal income tax? 📄 Summarize
4 – IRS – Publication 517 Social Security and Other Information for Members of the Clergy and Religious Workers 📄 Summarize
5 – IRS.gov Tax Topics 📄 Summarize
6 – Announcement 2001-106 📄 Summarize
7 – IRS.gov – Self-employed individuals Calculating your own retirement plan contribution and deduction 📄 Summarize
8 – IRS.gov – SEP plan Fix-It Guide — Common problems, real solutions 📄 Summarize
9 – IRS – Publication 560 Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans) 📄 Summarize
10 – IRS – Publication 525 Taxable and Nontaxable Income 📄 Summarize
11 – IRC § 401(k) 📄 Summarize
12 – IRS Determination 200142022 📄 Summarize

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