Common Tax Mistakes: Forgetting About Retirement Contributions
Max out those 401(k)s and IRAs – your future self (and your tax bill) will thank you.
Retirement Contributions = Tax Savings
One of the easiest ways to lower your tax bill is often through retirement contributions – yet many people forget to take full advantage of this. If you’re a high-earning W-2 employee, you likely have access to a 401(k) or similar plan at work, maybe an IRA on the side, and possibly even a Health Savings Account. Forgetting to contribute, or failing to report contributions properly, can cost you real money. Here’s why: contributions to traditional 401(k) and IRAs are typically tax deductible (or pre-tax), meaning they reduce your taxable income dollar-for-dollar. HSA contributions work similarly. This not only helps you save for the future, but also shrinks your tax bill today.
Think of it this way – every dollar you put into a tax-deferred retirement account is a dollar that isn’t taxed on your current return. If you’re in a high tax bracket, that tax break is significant. For example, if you’re in the 32% federal tax bracket, a $10,000 401(k) contribution saves you about $3,200 in federal taxes (plus any state tax savings)! That’s money back in your pocket and money saved for retirement. Forgetting to take advantage of this is like walking past free cash.
2024 Contribution Limits You Should Know
Tax laws set a cap on how much you can stash in these accounts each year (we wish we could throw unlimited millions into them, but alas). For 2024, the limits have gone up a bit from 2023, so high earners should pay attention and aim for the max if they can:
401(k) & 403(b) Plans: In 2024, you can contribute up to $23,000 of your salary to your 401(k) (or 403(b) or similar employer plan). irs.gov
This is a bump up from $22,500 the year before. If you’re 50 or older, you get to do catch-up contributions – an extra $7,500 on top of that, meaning folks 50+ can put in up to $30,500 of their own salary. These contributions are typically made pre-tax through payroll, which means they’ve already reduced the taxable wages shown on your W-2. But still, don’t “forget” to max it out if you can – not maxing out is effectively missing a chance to cut your tax bill. Also ensure your contributions are recorded correctly on your W-2 (Box 12, code D for 401k deferrals). It usually is, but it doesn’t hurt to check.
Traditional and Roth IRAs: For 2024, the IRA contribution limit is $7,000 (up from $6,500 last year). irs.gov
If you’re 50+, you can add an extra $1,000 catch-up, for a total of $8,000. Now, whether your traditional IRA contributions are deductible depends on your income and if you’re covered by a retirement plan at work. High-income earners often phase out of the deduction – for example, if you have a 401k at work and your income is into six figures, you might not get to deduct an IRA contribution (phase-out ranges apply). But some high earners still can: if you’re married and one of you isn’t covered by a work plan, that spouse’s IRA might be fully deductible even at high income, or if you’re not covered by a plan but your spouse is, the income limit for your deduction is higher. Bottom line: if you made an IRA contribution, make sure to report it and take the deduction if eligible. And if you didn’t contribute but are eligible to deduct one, consider doing so before the tax filing deadline (you often have until April 15, 2025, to contribute for tax year 2024 for IRAs). That could be an after-the-fact way to lower your 2024 taxes.
Health Savings Account (HSA): HSAs aren’t “retirement” per se, but many treat them like a stealth retirement account for healthcare. Contribution limits for 2024 are $4,150 for self-only coverage and $8,300 for family coverage. fidelity.com
If you’re 55 or older, you can tack on an extra $1,000. HSA contributions are 100% tax-deductible (or pre-tax via payroll). So, if you forgot to funnel some of your high income into an HSA and you’re eligible, you missed an opportunity. The good news: you have until the tax deadline (April 15, 2025) to contribute for 2024. So if you’re filing your return and realize “Dang, I’ve got another $2k of HSA space I didn’t use,” you can still drop money in now and count it for last year – then deduct it on your return. Just don’t forget to actually report the HSA contribution on Form 8889; if you contribute outside of payroll, that’s how you get the deduction. (HSAs are a fantastic deal: you save on taxes now, the money grows tax-free, and withdrawals are tax-free if used for medical expenses – triple win.)
Other Plans (457, TSP, etc.): High-earning government or nonprofit employees might have 457 plans or the federal Thrift Savings Plan – those generally follow the 401(k) limit of $23,000 as well. If you have access to multiple plans (say you have both a 401k and a 457 at a government job), you might contribute to both – which can effectively double how much you defer, depending on plan rules. For most, though, the limit applies per type of plan. Just be aware of what’s available to you.
Maximize Contributions, Minimize Taxes
Strategies to get the most bang for your buck (and cut that tax bill):
Contribute the Maximum if Possible: The simplest strategy – put in as much as you can, up to those limits. High earners in the $100k-$500k range often have the means to max out a 401(k). Hitting that $23k (or $30.5k if age 50+) not only boosts your retirement nest egg, it could significantly reduce your taxable income. For example, if you’re in the 35% tax bracket, a $23,000 contribution saves about $8,050 in federal tax. That’s nothing to sneeze at! Even contributing, say, $5,000 more than last year will save you money on taxes now. Challenge yourself to increase contributions each year, especially if you got a raise or bonus. Future you will be happy, and present you gets a tax break.
Grab the Employer Match (at Minimum): If you can’t max out, at least contribute enough to get your company’s full 401(k) match (if they offer one). That’s free money. While the match itself doesn’t affect your taxes today (employer contributions aren’t taxed as income either), not taking it is leaving compensation on the table. Plus, your own contributions up to that point are pre-tax, so you’re still saving on taxes. For example, if your employer matches 5%, make sure you’re putting in at least 5% of your salary.
Consider “Backdoor” Roth IRA: This is a bit tangential to tax deductions, but it’s a strategy for high earners to still get retirement money into a Roth IRA (which grows tax-free). If your income is too high to contribute to Roth directly, you can contribute to a Traditional IRA (nondeductible if you’re above the limit) and then convert it to Roth. It doesn’t give an immediate tax deduction (since the traditional IRA in that case wasn’t deductible), but it’s a way to get around Roth limits. The tax benefit is long-term (tax-free growth) rather than lowering this year’s taxes. It’s a good move if you’ve maxed other tax-advantaged spaces but want to save more.
Don’t Forget Spousal Contributions: If you’re married and one spouse earns much less or is not working, the high-earning spouse can often contribute to an IRA on behalf of the non-working spouse (a spousal IRA). The same $7,000 limit ($8k if 50+) applies, and depending on your situation that could be deductible too. High earners often miss this one because they assume “my spouse didn’t earn income, so no IRA.” But tax rules allow it if you file jointly and have enough income on the one side. It’s another way to get an extra tax-advantaged contribution in.
Review Payroll Elections for HSA/FSA: Open enrollment and the tax filing season are great times to double-check you’re taking advantage of all pre-tax benefit accounts. We talked about HSA, but also ensure you’re using a Flexible Spending Account (FSA) for healthcare or dependent care if it makes sense. Dependent Care FSAs (for childcare expenses) can save big tax dollars too (up to $5,000 pre-tax). These aren’t “retirement” but similar concept: use pre-tax dollars, save taxes. If you find at tax time that you owed a lot, maybe you didn’t use these enough.
How Forgetting Costs You: An Example
Let’s illustrate with a quick example. Jane is a marketing manager earning $150,000 (W-2 salary). Busy with work, she only contributed about $5,000 to her 401(k) in 2024, forgetting that she could contribute much more. She also forgot to contribute to the IRA she opened years ago. When doing her taxes, she realized she had a lot of room left: she could have put in another $18,000 to reach the 401(k) limit, and $6,000 into an IRA (she’s under 50). If Jane had contributed that extra $24,000, her taxable income would drop by the same amount. In the 24% federal tax bracket, that would cut her tax bill by about $5,760! In a state with 5% income tax, add another $1,200 saved. That’s nearly $7,000 that stayed in her tax bill instead of her bank account because she didn’t take full advantage of retirement contributions.
Even if you can’t afford to max everything, every additional dollar you contribute pre-tax saves you money. And if you did contribute but forget to report something like an IRA or HSA on the tax return, you’ll overpay. The IRS isn’t going to automatically give you a deduction you didn’t claim. The onus is on you to list it.
Don’t Miss Out
In summary, high earners should treat retirement contributions as a key part of tax planning. If you find yourself in April realizing you have extra cash sitting in a savings account that could be working harder, consider dumping it into an IRA or HSA before filing – it might lower your taxes. Always report your contributions correctly: check your W-2 to ensure 401(k) contributions are reflected, and fill out Form 8889 for HSAs or Form 8606 for nondeductible IRAs, etc., as needed.
Forgetting about these accounts is a common mistake, but one that’s easily fixed with a bit of awareness. It’s essentially paying yourself (in your retirement fund) instead of the IRS. So double-check all your retirement and savings contributions for 2024 before you finalize that return. Your future (and present) self will thank you for the tax savings!