Push your tax-favored savings to the limit with these tips.
Many investors struggle to find any money to save toward retirement, but a few fortunate investors have more favorable financial situations that allow them to save as much as they can. For them, taking full advantage of tax-favored retirement savings can make a huge difference not only in their long-run financial planning but also in managing their taxes right now.
Here, you’ll find the tax-favored savings opportunities that retirement savers can use to maximize the amount they put aside for the future.
The first step: getting IRAs funded
The first thing that anyone can do to save for retirement is to open an IRA. The contribution limits for IRAs are adjusted from year to year for inflation, and in 2017, you can set aside up to $5,500 in an IRA. Those who are 50 or older get to make an additional catch-up contribution of $1,000, bringing the total to $6,500.
One thing to note is that if your income is above certain limits, you won’t be allowed to make a Roth IRA contribution. Moreover, you might not be able to deduct a traditional IRA contribution if you’re covered by an employer plan at work. However, you can always make a traditional IRA contribution even if it isn’t deductible, as long as you have enough earned income from your job or business to cover the contribution amount.
Employee contributions to 401(k) plans at work
If you’re covered by a 401(k) or similar retirement plan at work, then your ability to save for retirement in a tax-favored way is greatly enhanced. The limits for employee 401(k) contributionsalso get adjusted annually for inflation, but they’re far higher than the corresponding IRA limits. Employees can save up to $18,000 in their 401(k)s during 2017, and those who are 50 or older get an additional $6,000 contribution limits as a catch-up provision.
Some other employer plans have lower contribution limits for participants. For instance, if your employer offers only a SIMPLE IRA plan, your contribution limit will be $12,500 if you’re younger than 50, with a $3,000 catch-up bump if you’re 50 or older. In any event, however, you’ll still be eligible to make regular IRA contributions on top of your employer plan savings.
Employer contributions to 401(k) plans
For most workers, employer contributions to 401(k) plans are limited to the matching and profit-sharing deposits that their employers make on their behalf. These contributions tend to be small and rarely approach the IRS-imposed limits. If you’re a key employee of your company or if you’re self-employed, however, you might be able to save a lot more through employer contributions to a 401(k).
Employer 401(k) contributions are limited to 25% of net compensation. There’s also an absolute maximum in combined employer and employee contributions to 401(k) plans. For 2017, that number is $54,000 for those under 50 or $60,000 for those 50 or older. Therefore, if you’re eligible for both employee and employer contributions, you can make your full employee contribution and then add an extra $36,000 to cover the employer contribution portion of your retirement plan savings.
Using non-retirement tax-favored savings vehicles
Finally, many people with ample money to save look at other opportunities to get tax-favored treatment on their savings. For instance, health savings accounts allow those who have high deductible health plans to set aside money toward healthcare expenses, and the accounts offer both upfront deductions and tax-free treatment of earnings if the money is used to cover eligible medical expenses. Contribution limits for 2017 are $3,400 for those with individual coverage or $6,750 for family coverage, with an additional $1,000 available to those who are 55 years old or older .
Similarly, those who anticipate educational expenses can use college savings vehicles like 529 plans to set money aside in advance. Those contributions don’t get an upfront tax break at the federal level, but earnings are tax-free if used for education. Most 529 plans have very high contribution limits that stretch into six figures, making it more likely that the limiting factor will be the total you expect to spend on educational expenses.
If you want to be smart about saving, taking full advantage of your tax-favored savings options is essential. By maxing out IRA, 401(k), and other non-retirement accounts, you can do your best to stay clear of Uncle Sam and keep more of your hard-earned money.
Are you planning your retirement? Be sure you’re not committing these 7 deadly retirement “sins”!
If you’re hoping for a safe and comfortable retirement, then you’d better be sure to avoid these 7 deadly “sins”! HINT: We’re all guilty of #1… while #2 alone could cost you a whopping $42,855*… and #5 is practically criminal!
Now here’s the GOOD news. One top financial planner – working alongside the experts at Motley Fool Wealth Management – has prepared a report, “The 7 Deadly Retirement “Sins” (And How to FIX Them).” And your copy is 100% free today.
Inside this free, no-nonsense guide, you’ll discover how much you should be saving, plus tips and tricks to wring the most out of your Social Security and 401(k). It could make all the difference to your retirement, so click the link below right now.
*If you’re among the 1-in-4 Americans NOT maxing your 401(k) match! Motley Fool Wealth Management, an affiliate of The Motley Fool, is a separate entity that is registered with the U.S. SEC, and all investment decisions for client portfolios are made independently by the asset managers at MFWM.
A message from Motley Fool Wealth Management
The Motley Fool has a disclosure policy.