As the end of 2024 approaches, time is running out to maximize your 401(K) contributions. With just two months left, it’s important to review your retirement savings plan and take advantage of the tax benefits associated with contributing to a 401(K). For tax payers in the 22% tax bracket, putting $23,000 into a 401(K) would result in a federal tax savings of $5,060. This not only builds your retirement nest egg but also provides immediate tax relief.
However, finding room in your budget to increase your contributions can be challenging. The good news is that there are strategies to boost your 401(K) without impacting your day-to-day cash flow. Below are two effective ways to increase your contributions and still maintain liquidity.
Replace a Paycheck With Savings From a High-Yield Savings Account
One of the simplest ways to increase your 401(K) contributions without affecting your regular budget is by utilizing savings from a high-yield savings account (HYSA). If you’ve been stashing away extra cash in a savings account that has been earning interest, now may be the perfect time to put that money to work in a more tax-advantaged vehicle, like your 401(K).
Here’s how it works: You can instruct your employer to increase the percentage of your paycheck that goes toward your 401(K), effectively lowering the cash you take home. To cover the shortfall in your cash flow, you can make up the difference by withdrawing funds from your HYSA. This strategy allows you to increase your retirement savings for the year without feeling the impact on your daily expenses.
Since many HYSAs offer interest rates that are significantly higher than traditional savings accounts, they provide a good temporary buffer for your monthly expenses while still allowing you to reap the benefits of boosting your retirement savings. The key advantage here is that while your high-yield savings might only earn 4-5% interest annually, the potential tax savings from increasing your 401(K) contribution can be far greater, especially in the long term when compounding comes into play.
Replace Paycheck by Selling Stocks With Minimal Tax Impact
Another way to increase your 401(K) contributions without feeling it in your cash flow is by selling stocks from a brokerage account—specifically those that will incur minimal tax implications. If you’ve held certain stocks or ETFs in a brokerage account for more than a year, you may qualify for the long-term capital gains tax rate, which is often lower than the short-term rate applied to stocks held for less than a year.
By selling some of your long-term holdings, you can replace a portion of your paycheck with the proceeds, which allows you to increase your 401(K) contribution. In this scenario, you take home less cash from your paycheck, but you make up for it with money from the sale of these stocks. Importantly, if you sell stocks that haven’t significantly appreciated in value, your tax liability will be minimized.
Many clients likely have tax-loss carry forwards remaining from 2022 that can be used to offset realized gains in 2024 (check this part of your 2023 tax return).
This strategy works well if you’re holding investments in a taxable brokerage account that aren’t essential to your overall financial goals, or if they aren’t performing as expected. By selling these stocks, you’re essentially repurposing your investments for tax-efficient retirement savings while reducing the taxable impact on the proceeds.
Not only will you benefit from an increased contribution toward your 401(K), but you’ll also be reducing your taxable income for 2024, further boosting the tax savings potential.
Maximizing Contributions: A Smart Financial Move
Contributing to a 401(K) is one of the most tax-efficient ways to save for retirement. Every dollar you contribute reduces your taxable income for the year, giving you immediate tax savings. For someone in the 22% tax bracket, contributing the maximum amount of $23,000 would reduce your taxable income by that same amount, resulting in a $5,060 reduction in federal taxes.
With only two months left in the year, now is the perfect time to review your finances and explore ways to maximize your contributions before the December 31 deadline. By leveraging the savings from a high-yield savings account or selling stocks with minimal tax impact, you can increase your 401(K) contributions without disrupting your cash flow.
Taking these steps will not only lower your taxable income for 2024 but also set you up for a more secure financial future by maximizing your retirement savings. Don’t miss out on the opportunity to benefit from the dual advantage of saving for the future and reducing your tax burden today.
Schedule time with us if you would like to do a screen-share together to review your 401(K) contributions and see if there is room for you to save money on taxes this year!
Note: this article was written by AI and edited by the author.
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