Reducing your taxable income should be an ongoing, year-round objective. One of the most effective and prudent ways to do this is by saving for retirement. Investing money in a qualified retirement account allows you to defer taxes on your contributions and earnings until retirement, when you may be in a lower tax bracket.
An employer-sponsored retirement plan is one of the easiest ways to invest for retirement. The main vehicle for most private sector workers is the defined contribution plan.
With a defined contribution plan, the amount of retirement income you receive depends on two things, the amount of money contributed and the investment performance of the account. The 401(k) is one of the most popular types of defined contribution plans.
You can defer part of your salary to a 401(k) plan, and you may be able to immediately increase your principal if your company offers matching contributions. For example, for every dollar you put in, your employer may contribute 50 cents.
Tax reform has permanently increased the amount you can save on a tax-favored basis, and the limits are set to rise with inflation in the coming years. For 2015, the contribution limit is $18,000.
Furthermore, tax laws allow people nearing retirement the opportunity to accelerate their retirement savings. 401(k) participants who are age 50 and older may make additional “catch-up” contributions of $6,000, for a total contribution of $24,000.
Companies sponsoring a 401(k) plan may also offer a Roth option. Contributions to a Roth 401(k) are made with after-tax dollars, but any earnings are tax-free. The money you withdraw in retirement will also be tax free, as long as you have owned the account for at least five years and are at least age 59½.
Any matching contributions made by an employer must be invested in a traditional 401(k) account, not a Roth. The same elective salary deferral limits apply, which means that your total contributions to a traditional 401(k), a Roth account, or both may not exceed $18,000—or $24,000 for those age 50 and older in 2015.
Saving for retirement is important, estimates of how much of your income you may need in retirement range from as low as 60 percent to as high as 90 percent.
If you’d like to learn more about saving for retirement, your options, and how to ensure that you’re on the right track contact Cruise & Associates today for a free consultation.
NOTE: This information should not be considered as tax/legal advice. You should consult your tax/legal advisor regarding your own tax/legal situation