Here’s How to Use an Extra Paycheck This Month

As tax season approaches and paychecks potentially swell with bonuses or refunds, the timing aligns perfectly with the 2025 IRS deadlines for maximizing retirement contributions. With contribution limits rising for 401(k)s and new catch-up provisions for older workers, this is a pivotal moment to optimize your financial strategy. Let’s break down the opportunities and data-driven decisions to make the most of that extra cash.

1. Supercharge Retirement Accounts Before April 15

The April 15 deadline for the 2024 tax year is a key cutoff for contributions to traditional IRAs, Roth IRAs, and workplace plans like 401(k)s. For those with an unexpected paycheck—whether from a bonus, refund, or overtime—this is the time to act.

• 401(k) and Similar Plans: The annual contribution limit for 2025 is $23,500, with catch-up room for those aged 50+ at $7,500. A groundbreaking addition for 2025 is the “super catch-up” for workers aged 60–63, allowing an extra $11,250 in contributions. This means those in this age bracket can contribute up to $34,750 total this year.
• IRAs: The $7,000 annual limit remains unchanged, but high earners in certain income brackets (e.g., single filers earning over $150,000) may still benefit from a Roth IRA conversion strategy.

Long-term growth is critical. Even small increases in contributions now could compound significantly over decades. For example, an extra $5,000 invested at the S&P 500’s average return would grow to $32,000 over 30 years.

2. Tax Efficiency: Navigating Phase-Outs and Roth Conversions

High earners face reduced tax benefits due to phase-out ranges, but there are workarounds:

• Roth IRA Contributions: Single filers earning over $150,000 lose eligibility gradually by $165,000. Instead, consider a Roth conversion: move pre-tax IRA funds to a Roth account, paying taxes now for tax-free withdrawals later.
• Saver’s Credit: Lower-income households (up to $79,000 for married filers) can claim a credit of up to 20% of contributions, effectively boosting returns.

For those in the 60–63 age bracket, the super catch-up is a rare opportunity. A $11,250 contribution at the S&P 500’s historical returns could add $67,000 to a portfolio by age 70.

3. Beyond Retirement: Strategic Allocations

If retirement accounts are maxed out, consider other avenues:

• Taxable Accounts: Invest in sectors with historically high dividends or growth potential. For instance, the tech sector’s average dividend yield of 1.2% (vs. utilities at 3.5%) may appeal to growth-focused investors.
• Debt Reduction: High-interest debt (e.g., credit cards at 18% APR) should take priority over market returns. Paying off $5,000 in such debt saves $900 annually in interest.

Prioritizing high-interest debt can yield better “returns” than many investments.

4. Final Considerations: Timing and Compliance

• Deadlines: Contributions to 2024 tax-year accounts must be made by April 15, 2025.
• Employer Plans: If your workplace offers a 401(k) match, ensure you’re contributing enough to capture the full benefit—this is free money.
• Automatic Enrollment: New plans must now enroll employees by default, but you can adjust contribution levels.

Conclusion: A Data-Driven Approach to Growth

The numbers are clear: leveraging the 2025 contribution limits and timing your moves by April 15 can amplify your financial future. For example, a 62-year-old maxing out their super catch-up ($34,750) in a 401(k) with a 7% annual return would see this year’s contribution grow to $113,000 by age 75.

Meanwhile, high earners bypassing phase-outs via Roth conversions or taxable accounts can maintain tax flexibility. Even small adjustments—like paying down debt or boosting retirement savings—add up. The April 15 deadline isn’t just for filing taxes; it’s a chance to secure your financial legacy.

As always, consult a tax advisor to tailor these strategies to your situation. The clock is ticking—act now, and let compound growth work in your favor.

The math is compelling. Use that extra paycheck wisely.