3 min read

December 10, 2020

Save on your taxes while you save for retirement

We’d all like to keep more of our hard-earned money, right? Learn how you can save on your taxes while you save for retirement.

Photo of a couple who is saving on their taxes while also saving for retirement.

We’d all like to keep more of our hard-earned money, right? There’s a way you can do that—by keeping taxes in mind as you save for retirement.

Increase deferrals into your employer’s retirement plan.

In 2021, you can contribute up to $19,500.1 Get a quick overview of the 2021 contribution limits.

You won’t pay taxes on that money until you eventually withdraw it at retirement, so you’ll lower your taxable income for the year—which means you’ll pay less in taxes today. (Some retirement plans have a lower limit, so make sure you look into the plan’s details.)

Don’t worry if you’re nowhere near being able to contribute the full limit. Even a small increase lowers your taxable income (and potentially your tax bill) and boosts your savings.

Have a retirement account sitting with a past job? You can’t contribute more to it, but you have other options—such as moving that money to a current employer-sponsored plan or rolling it over to an IRA.

Contribute to an IRA.

Contributions to a traditional IRA are also made on a pre-tax basis (for those eligible to deduct their contribution) and therefore lower your taxable income, similar to 401(k) contributions. (Roth IRAs work a little differently.) In 2021, you can contribute up to $6,000 to an IRA1. Learn more about IRAs.

Make catch-up contributions.

If you’re age 50 or older and still working, you can contribute an additional $6,000 to a 401(k) plan or 403(b) plan or $1,000 to an IRA beyond those standard limits.1 This not only lowers your taxable income (noticing a theme?), but also helps you fill in the possible savings gap if you got a late start saving for retirement. Here’s how catch-up contributions work.

See if you’re eligible for the Saver’s Tax Credit.

If you fall within certain income ranges, aren’t claimed as a dependent on someone else’s taxes, and contribute to an employer-sponsored retirement plan or an IRA, you may be eligible for the Saver’s Tax Credit. The specific amount depends on your income, but could be up to $2,000 for single filers or $4,000 for joint filers. Check out the details at the IRS website.

Ready to get started?

  • Consider increasing your contributions to a retirement savings account.
    • Log in to contribute more to your Principal employer plan account.
    • Call 800-986-3343, option 2 to increase contributions to your Principal IRA. (Interested in starting one? Here's how.)
  • Talk to your tax advisor about strategies for your retirement savings.

1 IRS annual limits for 2021.

Investment and insurance products are:

  • Not insured by the Federal Deposit Insurance Corporation (FDIC) or any federal government agency, 
  • Not a deposit, obligation of, or guaranteed by any bank or banking affiliate 
  • May lose value, including possible loss of the principal amount invested.

Investing involves risk, including possible loss of principal. No investment strategy, such as asset allocation or diversification, can guarantee a profit or protect against loss. 

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities are offered through Principal Securities, Inc., 800-547-7754, Member SIPC. Principal Funds Distributor, Principal Securities and Principal Life are members of the Principal Financial Group® (Principal®), Des Moines, IA 50392. Certain investment options may not be available in all states or U.S. commonwealths.