Grab These After-50 Tax Breaks

The rate of inflation has been falling in recent months. The Consumer Price Index, the government’s main gauge of inflation, rose 2.5 percent for the 12 months that ended in August 2024, down from 3.4 percent at the end of 2023. But that doesn’t mean the cost of living has gone down; it’s just rising at a slower rate. What to do?

Paying less in taxes is a good start. 

Americans are dealing with inflation in many ways.  People have created budgets, reduced spending, and started taking part-time side jobs for extra income, according to a study by the financial services company Empower. And that helps: The study indicates that 68 percent of those surveyed said they’ll be ready for retirement when the time comes.

But don't forget that big chunk of change you send to Uncle Sam every year. And at age 50, you become eligible for some considerable tax benefits, which can help if you’re behind on your retirement savings goals. 

Now you can contribute more to your traditional individual retirement account (IRA), Roth IRA or your employer-sponsored plan, or to your health savings account (HSA).

“It is enough to pick up your pace if you’re feeling behind, especially if you’ve got more disposable income and fewer expenses,” says Jacqueline Koski, a certified financial planner in Dayton, Ohio, who serves on the board of the Financial Planning Association (FPA).

Here’s how to take advantage of the tax laws to catch up, if needed. If you’re already retired, or close to it, these laws can enable you to reduce your tax bill. That’s too good to pass up.

1. Contribute more to your retirement plan

“The most important kicker when one is over 50 is the additional deductible contribution to a 401(k) or IRA,” says John Power, a certified financial planner at Power Plans in Walpole, Massachusetts. “These are often the highest earning years, and they often synchronize with children becoming independent,” reducing household expenses. If this is your situation, Power encourages maximizing your retirement savings.

For 2024, the contribution limit for employees who participate in 401(k) and 403(b) programs, most 457 retirement saving plans and the federal government's Thrift Savings Plan has been increased to $23,000, up from $22,500 in 2023. Employees 50 and older can contribute an additional $7,500, the same as for 2023, for a total of $30,500.

The contribution limit for a traditional or Roth IRA is $7,000, up from $6,500 for tax year 2023. The catch-up amount is $1,000, the same as in 2023. The 2024 catch-up contribution limit for a Savings Incentive Match Plan for Employees (SIMPLE) IRA is $3,500, unchanged from 2023.

Unfortunately, attractive as these catch-up provisions are for folks 50 and older, only 15 percent of those who are eligible have been making these contributions, according to Vanguard’s 2024 “How America Saves” report.

At the same time, data from the National Retirement Risk Index compiled by the Center for Retirement Research at Boston College indicates that 2 in 5 U.S. households are at risk of being unable to maintain their preretirement standard of living in retirement. 

In addition to making your retirement more secure, contributing to a tax-deferred retirement plan such as a traditional IRA or a 401(k) will also reduce your taxable income — which, in turn, reduces the taxes that you’ll be required to pay. Increasing your contribution won’t reduce the amount of your paycheck as much as you might think, thanks to the reduction in taxes.

Let's say your salary is $75,000. Contribute 6 percent of your income — $4,500 — and your taxable income will be reduced to $70,500. At your 2024 tax rate of 22 percent, that would cut your income tax bill by $990.

Remember, this applies to a traditional IRA or 401(k). Retirement contributions to a Roth IRA or Roth 401(k) are made on an after-tax basis. You get no up-front tax break for these contributions, but the qualifying withdrawals that you take in retirement will be tax-free. When you contribute pretax money to a traditional IRA or a 401(k), it will grow tax-free, but you'll be liable for taxes once you start making withdrawals in retirement.

Keep in mind that the tax deduction you receive may be limited if you are covered by a workplace retirement plan (or your spouse is) and your income exceeds certain limits. Under IRS rules, for 2024:

• A single taxpayer with a retirement plan at work can’t deduct any of their IRA contributions if their modified adjusted gross income (MAGI) is $87,000 or more. (MAGI is your adjusted gross income, minus certain deductions, such as student loan interest.)
• For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the MAGI cut-off is $143,000.
• If an IRA contributor is not covered by a workplace retirement plan but has a spouse who is, there’s no deduction at a MAGI of $240,000 or more.

Roth IRAs also have income limits. For 2024, a single taxpayer can’t deduct a Roth contribution if their MAGI is $161,000 or more. For married couples filing jointly, the cut-off is $240,000.

When it comes to catch-up contributions for a traditional IRA or Roth IRA, you have until the tax-filing deadline to make a deductible contribution — that is, you can count a contribution against your 2024 taxes if you make it by April 15, 2025. However, 401(k)s, 403(b)s, Thrift Savings Plans and most 457 plans go by the calendar year; to deduct those contributions, you must make them by Dec. 31.

2. Ease the pain of RMDs

Obviously, the longer you tap your retirement savings, the less you’ll have over your lifetime, and the greater the odds of outliving your money. Nevertheless, you can’t leave it untouched forever. You’ll probably have to face required minimum distributions (RMDs), a federally set  minimum amount you must annually withdraw from a tax-deferred retirement plan, such as a traditional IRA. (Roth IRAs don't require distributions while the owner is alive.)

Under rules that took effect in 2023 under the SECURE 2.0 Act, you can wait until the year in which you reach age 73 before you must start taking RMDs. Previously, the age was 72. For